Does your organization need a contract leakage study?

Best-in-class organizations regularly measure the performance of their contracts through internal metrics and against industry standards and leading practices. Robust contract management drives compliance, efficiency, and value through the utilization of key performance and financial metrics and effective implementation of controls across the lifecycle of the contract.

 Managing leakages from third-party contracts (whether it is customer-side contracts or vendor-side contracts) is an ongoing challenge for most organizations. This is increasingly true in today’s business environment where improving margins and reducing costs are priorities. The likelihood of value leakage is higher in case of contracts with higher complexity (in terms of scope, commercial structure, risks and performance monitoring) and therefore these offer the best opportunity for savings. An ineffective contract lifecycle management may result in contract leakages (financial or non-financial) between 5% – 15% of contract value.


Understanding contract leakage and its root cause

Contract leakage can be defined as a gap (financial or non-financial) between the value captured or promised during the pre-award phase and the value delivered during or at the end of the contract. The value captured during the pre-award phase is often lost over time due to:

  • Weak monitoring of contractual commitments and risks
  • Lack of business case/value tracking and reporting
  • Ineffective contract change control or administration procedures
  • Scope creep and delivery and quality failures
  • Bad planning and demand management
  • Ill-informed buying
  • Miscommunication and rigidity in managing the relationship

CXOs, business heads and procurement specialists should always look for key indicators that suggest the possibility of value leakages in contracts. The following are some indicators that have been seen in contracts as red flags:

  • Lack of ownership or accountability over fulfilment of the contract or business case
  • Ad-hoc or no tracking and reporting of contract performance
  • Multiple variations or change orders
  • Lack of understanding of commercial structure and scope of contract
  • Contract compliances and risks being managed in silos or in an inconsistent manner
  • Contract costs and schedule overruns
  • Unsatisfactory stakeholders despite all performance indicators being met
  • Long pending open issues and disputes

Consider an example: Management of a Fortune 500 company was facing difficulties with the operational performance of their large business process outsourcing contract – the internal stakeholders were unhappy and at the same time the cost of delivering those services had increased through multiple change orders/ amendments. They had lack of visibility on the fulfillment of contractual commitments and lacked the confidence of achieving the business case for outsourcing those services to a third party.

Management decided to conduct an independent study for assessing the current state of the contract. We evaluated the organization’s current contract and developed a review program that covers all aspects of the relationship – contract administration, performance, financial, compliance & risk and governance.  A detailed study was conducted of the contract structure, terms and conditions, existing processes responsible for monitoring performance & compliance to contractual commitments.

The review identified instances of leakages across the lifecycle of the contract – ambiguous critical contract clauses , impact and reasons for change orders/ amendments  not adequately reviewed before execution, service levels not properly baselined and monitored, financial commitments (investments, discounts/ rebates) and critical conditions of the contracts  not being fulfilled by the vendor, invoices not adequately reviewed before processing, and penalties/ service credits not computed and adjusted.

The outcome of this study helped the management to identify control gaps in the contract management across people, process and technology and direct & tangible cost savings/ renegotiation opportunities. Together with the management, we strengthened the existing contract management processes, and built & implemented a robust/ consistent contract governance framework.

For organizations, there is no better way to assess the quality of the current state of contract management processes and systems than through an objective and independent study. This study can help organizations identify opportunities to achieve savings, recover costs and enhance value from their existing contracts (in addition to overall improvements to the contract management function across people, process and technology).

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What Business Advisory Tools Do I Choose?

With a growing number of business advisory software tools on and entering the accounting market, it is often difficult to know what to choose.

At Smithink we recommend following our EnablerTM Seven Step to Success process using the best software at the critical steps. It is not as easy as having one tool for each step. There are several great applications that can be used. In this article, we will look at some of the tools that are available for each step.

The first step in the EnablerTM process is preparing your firm to succeed with business advisory services. This is critical to the ongoing delivery of services and should include the appointment of a champion and analysis of the right clients to start with. Many firms are using Excel sheets and Word documents to plan out their service packages and strategies for implementation. Key to this step is the development of a Client Relationship Management (CRM) solution such as MYP's Arm and Arm Pro.

From there you need to unlock your client's business advisory needs with an interactive client needs analysis. This, in my opinion, is the most important step, as it will indicate where the client's strengths and weaknesses are, and allows a proposal to develop to address specific needs. Great cloud tools here include Cash Flow Story's simple four-chapter approach to business performance and My Yardstick What's Important to you (WITY) tool and E-Scope automated pricing system can assist here to understand client needs and develop innovative proposals.

The third step is to create a "disturbance" in your client's mind using business value assessments. Paramount to this step is establishing how much the client thinks their business is worth against the commercial value and linking this to the concept of a Business Value Gap (BVG). Some of the best applications here are Cash Flow Story's Business Value Indicator and Bastar's materials, tools and programs that will calculate a capitalization rate for the client's business off financial data and a risk and value assessment. Another new tool in this space to increase the sellability of your client's business is Sellability Score.

From there we introduce financial diagnostic software to fill the gaps by analyzing and managing the client's key macro drivers and results that will improve their financial performance. We will look at where the business is today, its strengths (green flags) and weaknesses (red flags) and where it can be in the future. There are many solutions here including Cash Flow Story's Power of One, PANALITX, Fathom and Profit Guardian.

It is then time to look at the strategies required to implement micro services using smart tools and resources such as ESS BIZTOOLS and ESS BIZGrants. Attaché Software also has great tools here that can assist to implement key strategies with your clients.

Then track the performance of the client's business by preparing budgets and cash flows (or action plans) with Castaway, Calxa or Plan Guru. This step can link back to the development of business and action plans. MAUS Software's Master Plan is an innovative solution to address this need. Another great tool here is MYP's Estate Planning application to unlock your client's estate planning needs and develop key strategies for the future.

Finally, generate new business by growing your business advisory specialization through profitable scenario planning and offering your "how would you like to see the financial impact of every business decision before you make it" service. This look into the future requires software that can simply show the client their pre and post position. Any of the financial diagnostic tools will adequately handle this task.

With this myriad of choices, a firm needs to be confident that they select the right application for their clients and staff.


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How to Start a Consulting Business

Businesses certainly understand what consultants are. In 1997 U.S. businesses spent just over $12 billion on consulting. According to Anna Flowers, spokesperson for the Association of Professional Consultants in Irvine, California, the association has recently noticed an increase in calls for information from people who want to get into the business. "The market is opening up for [the consulting-for-businesses] arena," Flowers says.

Melinda P., an independent consultant in Arlington, Virginia, thinks more people are getting into the consulting field because technology has made it easier to do so. "The same technology that has helped me to be successful as a consultant has made it easier for others to do the same," she says.

A consultant's job is to consult. Nothing more, nothing less. It's that simple. There's no magic formula or secret that makes one consultant more successful than another one.

But what separates a good consultant from a bad consultant is a passion and drive for excellence. And--oh yes--a good consultant should be knowledgeable about the subject he or she is consulting in. That does make a difference.

You see, in this day and age, anyone can be a consultant. All you need to discover is what your particular gift is. For example, are you very comfortable working with computers? Do you keep up with the latest software and hardware information, which seems to be changing almost daily? And are you able to take that knowledge you have gained and turn it into a resource that someone would be willing to pay money for? Then you would have no trouble working as a computer consultant.

Or are you an expert in the fund-raising field? Maybe you have worked for nonprofit agencies in the field of fund-raising, marketing, public relations or sales, and over the years you have discovered how to raise money. As someone who has turned a decade of fund-raising successes into a lucrative consulting business, I can tell you that fund-raising consulting is indeed a growing industry.

Things to Consider Before You Become a Consultant

  • What certifications and special licensing will I need? Depending on your profession, you may need special certification or a special license before you can begin operating as a consultant. For example, fund-raising consultants don't need special certification, although you can become certified through the National Society of Fund Raising Executives. And in some states, you may need to register as a professional fund-raising consultant before starting your business.
  • Am I qualified to become a consultant? Before you hang out your shingle and hope that clients begin beating your door down to hire you, make sure you have the qualifications necessary to get the job done. If you want to be a computer consultant, for example, make sure you are up to date in the knowledge department with all the trends and changes in the computer industry.
  • Am I organized enough to become a consultant? Do I like to plan my day? Am I an expert when it comes to time management? You should have answered "yes" to all three of those questions!
  • Do I like to network? Networking is critical to the success of any type of consultant today. Begin building your network of contacts immediately.
  • Have I set long-term and short-term goals? And do they allow for me to become a consultant? If your goals do not match up with the time and energy it takes to open and successfully build a consulting business, then reconsider before making any move in this direction!

Top 20 Consulting Businesses Thriving Today

Although you can be a consultant in just about any field these days, the current top 20 consulting businesses include:

1. Accounting: Accounting is something that every business needs, no matter how large or small. Accounting consultants can help a business with all of its financial needs.

2. Advertising: This type of consultant is normally hired by a business to develop a good strategic advertising campaign.

3. Auditing: From consultants who audit utility bills for small businesses to consultants who handle major work for telecommunications firms, auditing consultants are enjoying the fruits of their labor.

4. Business: Know how to help a business turn a profit? If you have a good business sense, then you'll do well as a business consultant. After computer consulting, people in this field are the next most sought after.

5. Business writing: Everyone knows that most businesspeople have trouble when it comes to writing a report--or even a simple memo. Enter the business writing consultant, and everyone is happy!

6. Career counseling: With more and more people finding themselves victims of a corporate downsizing, career counselors will always be in demand. Career counselors guide their clients into a profession or job that will help them be both happy and productive as an employee.

7. Communications: Communications consultants specialize in helping employees in both large and small businesses better communicate with each other, which ultimately makes the business more efficient and operate smoothly.

8. Computer programmer: From software to hardware, and everything in between, if you know computers, your biggest problem will be not having enough hours in the day to meet your clients' demands!

9. Editorial services: From producing newsletters to corporate annual reports, consultants who are experts in the editorial field will always be appreciated.

10. Executive search/headhunter firms: While this is not for everyone, there are people who enjoy finding talent for employers.

11. Gardening: In the past decade the demand for gardening consultants has blossomed (pun intended) into a $1 million-a-year business. Not only are businesses hiring gardening consultants; so are people who are too busy to take care of their gardens at home.

12. Grantsmanship: Once you learn how to write a grant proposal, you can name your price.

13. Human resources: As long as businesses have people problems (and they always will), consultants in this field will enjoy a never-ending supply of corporate clients, both large and small. (People-problem prevention programs could include teaching employees to get along with others, respect and even violence prevention in the workplace.)

14. Insurance: Everyone needs insurance, and everyone needs an insurance consultant to help them find the best plan and pricing for them.

15. Marketing: Can you help a business write a marketing plan? Or do you have ideas that you feel will help promote a business? If so, why not try your hand as a marketing consultant?

16. Payroll management: Everyone needs to get paid. By using your knowledge and expertise in payroll management, you can provide this service to many businesses, both large and small.

17. Public relations: Getting good press coverage for any organization is a real art. When an organization finds a good PR consultant, they hang on to them for life!

18. Publishing: If you're interested in the publishing field, then learn everything you can and you, too, can be a publishing consultant. A publishing consultant usually helps new ventures when they are ready to launch a new newspaper, magazine, newsletter--and even websites and electronic newsletters.

19. Taxes: With the right marketing and business plan (and a sincere interest in taxes), your career as a tax consultant can be very lucrative. A tax consultant advises businesses on the legal methods to pay the least amount of tax possible.

20. Writing services: Anything related to the written word will always be in demand. Find your specialty in the writing field, and the sky will be the limit!

Target Market

Your idea may be the best one you have ever thought of, but there needs to be a market for your ideas. Someone must be willing and able to pay you for your expert advice.

In other words, who are your potential clients? Will you be marketing your consulting services to large corporations? Or will you offer a specialty that would only be of interest to smaller businesses? Perhaps your services will be sought after by nonprofit organizations. Whatever the case, before you go forward, make sure you spend time preparing both a business plan and a marketing plan. You won't be disappointed with the results--especially when clients begin paying you!

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Why should Start-ups Outsource Accounting?

Starting a new, independent venture can always be risky, hard, and usually, comes with a massive set of responsibilities that you’ve practically got to manage all by yourself. With the initial stage of a start-up struggling to multitask various operations at one go, it leaves the company constrained both by the burden of operations to be handled and the budget at hand. At such a crucial time of your business, the only respite that you can look out for is by shedding some of a load of your tasks from your shoulder and outsourcing certain activities.
You tend to reinstate your faith in outsourcing when the words of Lee Kaun Yew resonate in your mind:
“If you deprive yourself of outsourcing and your competitors do not, you’re putting yourself out of business.” And you certainly don’t want your company to be out of competition, right?
We understand that an initial start-up must stretch its budget far and by and we certainly do not recommend you to hire a full-time accountant when there is a crunch on revenues. However, outsourcing accounting services can be your savior plan that will not only be practical but also cost-effective for your enterprise.
So, when is the perfect time to hire an accounting and finance service? Well, the answer to this question largely depends on the stage that your start-up is currently floating in. Many companies right away hire outsourcing services for accounting and finance at an adolescent stage of their venture, while some wait it out. But, there’s always a catch to look out for that can indicate whether you require an immediate accountancy service – When your expenses have exceeded in general and you are facing a growth in your business, then it is time for you to have a solid ground on how your cash flow is growing.
It is often seen that companies have a very amateur image of how outsourcing an accounting and finance service helps them. It’s high time to get this myth busted because there’s much more to the services provided by an accountant than just staring at a computer screen tallying numbers!

There’s more to accounting service than basics. With an expert advisory and analysis on fields like business licenses, expense tracking, policies, and procedures, month-end accounting, payroll, tax preparation, budget creation, cash flow analysis, audit support and preparation, an outsourced accounting firm can prove beneficial by giving you much needed support that your business requires.
Still skeptical of choosing to outsource accounting? Let’s clear your doubt by stating the benefits of what outsourcing has in store for you –
Hands on expert analysis for your finance: Since start-ups invest a major amount of time concentrating on core activities like marketing and production, they tend to sideline support activities such as finance and accounting. Moreover, if your company has little or no experience on these support activities, then you should consult an accountancy firm that can provide a more effective result through their professional skills than your in-house team.
Saves big on your expenses: Support activities tend to get expensive as and when the business is likely to grow and expand. And in such a case, the scenario of hiring an accountant as an employee can burn a hole in your funds. On the contrary, the cost of outsourcing this service is much less where you can achieve efficient solutions at an affordable price; all this at less than a fraction of hiring a full-time employee.
You’re still your own boss: Many start-ups fear the notion of outsourcing their accounting services on the pretext of losing control over the accounts because of a shift in the response from the start-up to an outsourcing firm. But that is just a misconception because many companies fail to realize that the companies tend to manage an outsource provider more stringently than they would have with their in-house department. Thus, in a way, the control of your accounts and finance increases with outsourcing.
It has been observed, time and again, that small business rise in the value chain when they outsource non-core activities because this gives them much exposure on creating value for their business rather than devoting time to support it. Outsourcing non-core functions of your business give you and your company
much time to invest on what you do best. Don’t let your business take a setback from the success it can achieve. Outsourcing always makes for a wise solution.

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10 Frequently Asked Questions About Payroll Processing

Processing payroll is one of the most complex and time-consuming tasks a business must complete. If you’re new to the process, payroll can be confusing. Here are answers to some of the most frequently asked questions about payroll.

What Is an EIN?

The IRS issues employee identification number (EIN) numbers. This 9-digit number is used on federal and state tax filings for businesses, including payroll tax reporting documents. You can apply for an EIN through

The EIN number can be used for a variety of business entities, including sole proprietorships, S corporations, and C corporations. Assume, for example, that you operate a C corporation, Ganz Manufacturing. Your corporation can operate under more than one fictitious name, and you can use the same EIN number. Ganz Furniture and Ganz Tool and Die, for example, could be fictitious names used by the same corporation.

This policy simplifies the tax filing process. You’ll need to register your fictitious names in the state where your business is headquartered.

What Is an I-9 Form?

Employers use Form I-9 to verify the identity and employment authorization of individuals. Every U.S. employer must have a completed Form I-9 for each worker hired, whether or not the individual is a U.S. citizen. To complete the form, an employee provides documents as evidence of their identities, such as a driver’s license, birth certificate, or passport.

An employer must retain each Form I-9 for a specific period of time, and a state or federal government official may ask to inspect the forms. Government agencies review I-9 forms to verify that each employee is authorized to work in the U.S.

What Is a W-4 Form?

Each worker completes IRS Form W-4 to indicate the amount of tax withheld from gross pay for federal income taxes. Employees complete similar forms for state income tax withholding.

How Do I Determine Payroll Taxes?

Once a W-4 is completed, the employer uses IRS guidelines to calculate the dollar amount of federal income taxes withheld. Each state has similar guidelines to calculate state tax withholdings.

The payment schedules are published in IRS Publication 15.

What Does Withholding Actually Mean?

Withholding refers to the dollar amount of federal and state income taxes that an employer collects from a worker’s gross pay. The dollar amount is determined based on the IRS W-4 form and the state’s withholding form. The company sends the taxes withheld to the IRS and the state’s department of revenue.

The dollar amounts withheld are reported to the worker on Form W-2 after year-end. It’s the employee’s responsibility to file their personal tax return and calculate their tax liability. The worker subtracts the W-2 taxes withholdings from the tax liability, and any remaining amount of taxes owed should be paid when the tax return is filed. This process applied to both federal and state taxes.

What Are Third-Party Liabilities?

In addition to withholding taxes, employers may also withhold the worker’s share of payments for insurance premiums, retirement plan investments, and other benefits. The worker decides on the amounts withheld for the payments. Once these payments are withheld from gross pay, the employer forwards the payments to each third party (insurance company, an investment firm, etc.).

When Do I Need to File W-2s and 1099s?

W-2 and 1099 forms are issued for different reasons. A W-2 is issued to an employee to report gross wages earned, tax withholdings, and other withholdings from gross pay. If you have wages withheld to pay for insurance premiums or to fund a retirement plan, those amounts are reported on a W-2.

The IRS requires employers to mail W-2 forms to workers no later than January 31st of the year following the end of the tax year. So, 2017 W-2s must be mailed by January 31st of 2018.

If your firm has paid at least $600 to a vendor for a product or service, you must issue a 1099-MISC form to that vendor. Freelance workers are considered vendors and are issued a 1099-MISC form. The IRS also requires employers to mail 1099-MISC forms to vendors no later than January 31st of the year following the end of the tax year. The employer combines all of 1099 issued and reports them to the IRS on Form 1096.

What Is Workers’ Comp Insurance?

Businesses purchase workers’ comp (compensation) insurance policies to pay for medical care and other costs if a worker is injured or killed while working on the job. The insurance policy pays for medical expenses and makes payments to the injured party based on a state’s workers’ compensation laws.

The insurance premiums are based on the total dollar amount of payroll a company pays, and the type of work performed the employees. If workers perform manual labor or work in jobs that expose them to physical injury (such as construction), the insurance premiums will be higher.

Construction, engineering and other firms that have a higher risk for worker injury need to have safety plans in place to reduce the risk of workplace injuries. If you can limit worker injuries, you can keep your insurance premiums at a reasonable level.

Am I Required to Have Labor Law Posters?

There are state and federal labor law poster requirements for businesses. The posters address worker rights related to the federal minimum wage, equal employment rights, and worker safety, among others. Companies can purchase “all-in-one” posters for both federal and state labor law requirements. The posters should be displayed so that employees can see them each day. The posters are typically posted in a break room.

What Does a Payroll Company Do?

A payroll company can perform many of the complex tasks required to process payroll accurately. To get started with a payroll company, a business provides the gross pay and withholding amounts for each employee. The payroll company uses current tax laws to calculate the correct tax withholdings and also withholds any benefit payments.

You can give a payroll company access to your corporate bank account so that the company can send each net pay amount to employees. This outside firm submits the payments withheld to the IRS, state revenue departments, and any other third parties. The company will complete all payroll reports and create W-2s and 1099s at year-end.

Every business should consider using a payroll company. This decision will help you save time and ensure that your payroll processing is accurate.

QuickBooks offers a number of payroll solutions ranging from simply cutting checks to full-service payroll. All payroll products integrate directly with your accounting software to keep your books in order with less work.

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Asset Protection Benefits from Retirement Plans

I was recently talking with a CPA in my network, and he told me how he attended a continuing education seminar on how "retirement plans are the best form of asset protection available." Although retirement plans offer some asset protection, and should be a part of everyone's asset protection strategy, they are not the end all be all of asset protection. Nor are they the best form of asset protection available.

There are two categories of retirement accounts: ERISSA Accounts (401K, profit-sharing plans, pension plans, monty-purchase pension plans, stock-bonus plans, and employee stock-ownership plans), and Non-ERISSA Accounts (most common are IRA and Roth IRA).

Federal law protects ERISSA Accounts from the owner's creditors. However, there are several exceptions: (1) ERISSA plans are not exempt from IRS tax liens. Tax liens are actually fairly common among small business owners. (2) ERISSA plans are subject to being split in a divorce proceeding, and also the ERISSA plan money is not exempt from alimony and child custody payments. (3) Inherited ERISSA accounts probably aren't exempt from creditors. A US Supreme Court case recently said that inherited ERISSA accounts aren't exempt in the bankruptcy context. It is logical that a court would extend this reasoning to a normal creditor of the person who inherited the ERISSA plan. (4) The retirement fund is only protected as long as it is in the fund. When it comes out of the fund (i.e. distribution) then it is no longer exempt. Here, Oregon law picks up the slack a little, and exempts $7500 of accumulated ERISSA funds from garnishment. However, don't forget that a large ERISSA fund could have quite sizable Required Minimum Distributions.

Non-ERISSA Plans 
Non-ERISSA plans are exempt under Oregon State law, which is similar to the federal protection of ERISSA plans, with a couple of exceptions. First, 75% of a beneficiary's interest in a plan, or 50% of a lump sum disbursement or withdrawal is exempt from a domestic support obligation. Second, traditional and Roth IRAs have an exemption limit of $1,000,000 (adjusted periodically for inflation) under federal bankruptcy law. Other than those two exceptions, Oregon law does not protect non-ERISSA plans from the above listed federal ERISSA exceptions.

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How to Create a Profit Sharing Plan for Your Business

As an employer, you may struggle to align the overall success of your business with the individual interests of employees. A common tool used to achieve this alignment is profit sharing. If you can achieve effective alignment through a profit sharing plan, you may enjoy the benefit of increased employee retention, and more buy-in from employees into the company’s mission.

Profit sharing comes in many forms that vary both across industries and positions. Regardless of the model, profit sharing is typically determined through a formula with components consisting of certain company metrics. Accordingly, an automated system of tracking such metrics and incorporating the metrics into the profit sharing plan is key to avoiding payroll headaches.

Below are some common profit sharing models within specific industries.

Profit Sharing for Agencies and Law Firms

Businesses that bill by the hour have long been known to compensate employees via profit sharing. Consider ad agencies and law firms. Both bills by the hour and both are famous, or perhaps infamous, for partnership hierarchies. Underlying those notorious hierarchies are profit sharing strategies that compensate employees more lucratively as they bill their way up the partnership ladder.

An old-school formula for calculating profit sharing within the billable-hour/partnership model is based on an employee achieving a billable hour target, and receiving a profit share based on progress towards that goal:

  • 100% of target = 30% of salary profit share
  • 90% of target = 10% of salary profit share
  • 80% of target = 5% of salary profit share
  • <80% of target = no profit sharing

A common prerequisite to paying out under any profit sharing model is the business reaching an overall target. For instance, before any payouts are made, the business must achieve a target metric (e.g. operating income, EBITDA, profit, etc.).

In recent years, billable hour-based compensation has come under fire, especially in the legal industry. Many have argued that the model encourages employees to concentrate on billing a certain amount of hours as opposed to delivering quality work.

To combat concerns, many firms and agencies have attempted incorporate other elements into their profit sharing equations— things like tenure, profitability, client satisfaction, business development, personal skill development, etc. Incorporating such elements into a profit sharing formula can be challenging, as some metrics are more measurable than others. Some businesses use a point system to address the challenge:

  • Tenure: one point for each year of tenure
  • Profitability: two points for every dollar* of profit generated
  • Client satisfaction: one point for a positive client rating
  • Business development: one point for meeting a new client generation goal
  • Personal skill development: one point for meeting a personal skill development goal

*”every dollar” could vary depending on the business (every $1,000, every $10,000, every $100,000, etc.)

These points can be arranged or weighted differently with the overarching goal of achieving a profit sharing formula that aligns business success with the highest level of payout to the employee. Below is an example of how these elements might fit into a profit sharing formula:

  • 6 points = 30% of salary profit share
  • 5 points = 10% of salary profit share
  • 4 points = 5% of salary profit share
  • 3 points = 2% of salary profit share
  • < 2 points = no profit sharing

Whether you adopt the old-school formula, the more modern approach or something in between, certain company metrics are bound to end up into your formula. The more complex the formula, the harder it is to track so be sure to build it into your payroll workflow.

Profit Sharing for Retail Businesses

Unlike industries tied to billable hours, the retail industry has its own set of success metrics that find their way into profit sharing formulas. If you are in retail, your sales force is likely salesperson heavy and your profit sharing model might look similar to a commission structure.

Profit sharing in a retail environment will most likely be tied to revenue or margin generated through product sales. Before diving into two common retail profit sharing models, it should be noted that profit sharing and commissions are completely different types of compensation. Commissions are typically paid as part of a salary, earned at frequent, consistent intervals throughout the year. Alternatively, profit sharing is paid at infrequent intervals and is typically not guaranteed since it is often contingent upon the entire company reaching a certain level of success.

Two common models for a sales-focused, retail environment are the net revenue model and a gross margin model.

The Net Revenue Model

In a net revenue model, the profit share is based on a percentage of net revenue from an employee’s sales. In a retail environment where salespeople have no control over product pricing, the net revenue model might be most appropriate. The formula is simple, straightforward, and the salesperson is purely compensated to drive more sales:

(Revenue) * (X%) = profit share

To view this formula in operation, let’s assume you calculate the profit share once a year, based on an entire year’s worth of a salesperson’s sales. If the salesperson makes 2% of the yearly revenue he or she generates, $100,000 in yearly sales generates $2,000 in profit sharing.

Before deploying this strategy, you need to make sure you can afford paying out profit share based on revenue. Revenue does not account for the cost of the goods sold or other business expenses. Consider the example above in light of the costs listed below:

  • Costs of goods: $30,000
  • Salesperson salary: $65,000
  • Other expenses associated with sales: $4,000

When accounting for the additional costs associated with generating the $100,000 in revenue, a $2,000 profit share leaves your business with a loss of $1,000 for this particular salesperson. Accordingly, tracking all of your business costs is key to understanding whether net revenue profit sharing is feasible for your business.

The Gross Margin Model

If your retail business includes an environment where a salesperson negotiates price, it might make sense to use a gross margin model. Gross margin is the revenue generated from the sale of goods, less the direct cost of the goods. The employee’s share in a gross margin model, incentivizes the employee to sell at a higher price:

(Revenue – COGS) * (X%) = profit share

Consider the example used above, where the cost of goods was $30,000. If the salesperson is paid 3% of gross margin and sells at $100,000, his or her profit share is $2,100. Like the previous example, your company is in the hole if the salesperson sells at $100,000. But, if the salesperson sells the same goods for $102,000, the salesperson’s profit share increases to $2,160, and the company actually enjoys a $840 profit.

This is a perfect example of a profit sharing scenario that aligns the employee’s interests with business success. By incentivizing the salesperson to sell at a higher price, the employee increases profit share while increasing the overall profitability of the business.

Profit Sharing for E-Commerce Businesses

Like retail, e-commerce is sales heavy. However, distinct differences between e-commerce and brick and mortar retail require tweaks to the the net revenue and gross margin models listed above, or an entirely different approach altogether.

The Affiliate Model

In an e-commerce environment, competition is essentially endless. There is no store where you can get in front of your customers at the exclusion of the competition. Further, a consumer can price check your goods and services against every other e-commerce competitor with the click of a mouse. Accordingly, attention and mindshare become of prime importance to an e-commerce business. Out of this environment, the online affiliate model was born.

An e-commerce store can gain attention and mindshare by deploying a limitless force of affiliates to promote products or services. If an affiliate is successful in closing a sale, the e-commerce shop compensates the affiliate for the sale.

The net revenue and gross margin formulas work exactly the same for the affiliate model as they do in the retail model. The key difference is the percentage paid. In some e-commerce set ups, you may be able to afford a much higher percentage rate. For instance, if you are a solopreneuer selling a digital product that costs you nothing to reproduce, a 50% profit share with your affiliates may be perfectly reasonable—your cost of goods is low, no sales person salaries, and other expenses might be low.

On the other hand, if you are selling low margin products or products that are resource intensive to develop, your percentage may be very low. In either case, the key is to track the metrics applicable to your profit sharing model carefully.

The Equity Model

An alternative model for e-commerce, or any industry, is profit sharing through equity awards or payment rights. You may look to these options in your early years before there are any profits to share. Generally speaking, equity is ownership in the actual company. Founders often give up some portion of their equity (or ownership) to early employees because the funds are not there to compensate well through salary or profit sharing.

The only way an employee can make money through equity is if the company becomes successful to the point of distributing profits to its equity owners. There are many approaches to an equity strategy, but a key point is that giving up equity means giving up control. If giving up control of your company is a problem, you might consider a payment rights strategy.

The Payment Rights Model

Payment rights act like equity from a profit sharing standpoint, but payment rights come with no ownership or control rights. Here’s an example. Let’s say you and a co-founder split the company 50/50. You each own half of the company and you each are entitled to half of the company’s distributed profits.

A talented candidate you want to hire requires a restructured profit distribution in three equal amounts: 33/33/33. You and your co-founder are fine splitting the profits three ways instead of two, but you don’t want to give up your control over the company. Granting the new candidate a payment right of 33% gives the candidate the compensation desired through a right to 33% of any profits shared. However, the payment right comes with no actual ownership or control of the company. The original co-founders keep their 50% control. Payment rights are a creative way to give highly qualified employees significant financial incentives via profit sharing without losing control of the company.

Track Your Metrics

Profit sharing comes in many flavors. The formula that fits your business depends on many factors. The one consistency across all profit sharing formulas is the inclusion of metrics applicable to the success of the business. Metrics must be tracked and easily accessible to successfully evaluate, implement, and execute a profit sharing plan. If you can choose and track the metrics that drive success for your business and enable profit sharing, you may find a win-win for your business and your employees.

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Shopping trends and taxes

I like to look at trends because they are interesting and many have tax implications.* Trends may indicate a need to update or modernize tax rules or systems. I'm a bit behind on blogging on this, but several weeks ago, there was an article in Fortune - Phil Wahba, "Major Wall Street Firm Expects 25% of U.S. Malls to Close by 2022," 5/31/17. Reasons included bankruptcies and continuing growth in retail e-commerce sales.

I remember when the US Census Bureau first started reporting retail sales for e-commerce in the 1990s and it was less than 1%. They just updated data for 2015 and report that e-commerce retail sales represent 7.2% of total sales for 2015 (it was 6.4% in 2014). That doesn't seem like a lot to me. In contrast, the US Census Bureau reports that for 2015, e-commerce sales of merchant wholesalers represented 30.2% of total sales (it was 28.1% in 2014).

Are retail e-commerce sales going to increase to the point were 25% of US malls will close in the next five years? Seems high to me.  I expect re-purposing where, perhaps, we might do more online shopping while at the mall looking at samples of what we can buy, and getting a latte and recharging our smartphones.  That would use less retail space. Malls might add more ways for people to hang out - activities, fairs, etc.

Tax implications?  A few:

  • More online shopping can mean more uncollected use tax although I suspect a lot of the e-commerce growth will be with Amazon that collects tax in all states (at least on their direct sales).
  • If malls turn into abandoned buildings or vacant lots, property taxes will go down. Is there another need for them?  With an aging population, perhaps the space gets turned into living spaces for older folks - single level, close to public transportation and medical facilities, etc.
What do you think? Will we see 25% of malls close? What will happen to the space?
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The most common mistakes when managing personal finances

The ability to manage money competently is especially valuable quality in the conditions of financial crisis, when the purchasing power of the population is shrinking, inflation is rising, and currency exchange rates are completely unpredictable. Below are the common mistakes related to money affairs along with financial planning advice to help manage your own finances properly.

The budget is the most basic thing in financial planning. It is therefore especially important to be careful when compiling the budget. To start you have to draw up your own budget for the next month and only after it you may make a yearly budget.

As the basis takes your monthly income, subtract from it such regular expenses as the cost of housing, transportation, and then select 20-30% on savings or mortgage loan payment.

The rest can be spent on living: restaurants, entertainment, etc. If you are afraid of spending too much, limit yourself in weekly expenses by having a certain amount of ready cash.

"When people borrow, they think that they should return it as soon as possible," said Sofia Bera, a certified financial planner and founder of Gen Y Planning company. And at its repayment spend all that earn. But it's not quite rationally ".

If you don't have money on a rainy day, in case of an emergency (e.g. emergency of car repairs) you have to pay by credit card or get into new debts. Keep on account of at least $1000 in case of unexpected expenses. And gradually increase the "airbag" to an amount equal to your income for up to three-six months.

"Usually when people plan to invest, they only think about profit and they don't think that loss's possible", says Harold Evensky, the President of the financial management company Evensky & Katz. He said that sometimes people do not do basic mathematical calculations.

For example, forgetting that if in one year they lost 50%, and the following year they received 50% of the profits, they did not return to the starting point, and lost 25% savings. Therefore, think about the consequences. Get ready to any options. And of course, it would be wiser to invest in several different investment objects.

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