Going Electronic: Switching from paper-based transactions improves cash flow, cuts costs
According to a 2013 study by the Association for Financial Professionals (AFP), 81 percent of B2B payments in 2004 were made with paper checks; by 2013, paper transactions had dropped to 50 percent as businesses recognized the benefits of electronic transactions.
“We’re seeing a gradual shift to automated clearing house (ACH) services or commercial cards, but old habits die hard,” says Karen Hacker, a certified treasury professional and Comerica Bank vice president. “A lot of people say, ‘My checks work, my vendors are getting paid, I don’t see a reason to change.’ They often don’t realize how much it costs, from the labor to create the check, to put it in the envelope, and mail it to the time it takes to clear.”
Hacker says using electronic payments can cut costs from 50-70 percent based on her experience. In the AFP survey, 57 percent of organizations cited cost savings as their top reason for moving to electronic payments.
ACH payments reduce the likelihood of fraud by offering an alternative to paper checks that prominently display names, addresses, and account numbers to prying eyes. They can also be used to forecast cash flow.
“You write a check today and it may be deposited tomorrow, in two weeks, two months, or never,” Hacker says. “With an electronic payment, you specify the effective date and you can forecast your cash flow accordingly. It takes all the guesswork out of when that debit is going to hit your account.”
The automated payment processing features of an ACH system can help companies manage disputes that arise with vendors and comply with increasingly complicated business regulations. Many firms also realize accounts payable and cash flow benefits by offering vendors the option to be paid with a commercial card linked to a bank line of credit. Accepting payment by commercial card (not a physical card, but a card number) lets the vendor receive payment by drawing from the funds authorized on the card. The result? Happiness all around as the vendor receives prompt payment, and the company has the use of its money until the next billing cycle.
“No matter the size of the company, most will agree that electronic payments are probably a much better alternative than paper checks,” Hacker says. “What may deter them is a fear of the unknown — will they have to change a lot of processes, how much effort will they have to expend to realize those benefits?”
Hacker recommends that companies phase in electronic payments with a small group of vendors to, in effect, “get their feet wet.” Once this pilot program has run successfully, more vendors can jump into the pool.
“We always recommend a phased approach to understand what changes are involved,” Hacker says. “It’s better to migrate slowly than to throw the entire accounts payable department into upheaval.”
The cost of implementing an electronic payment system depends on how much automation and change the company is prepared to accept.
“To be truly automated where they are connecting directly to the bank could require an IT investment, but there are some solutions where no investment is required,” she says. “If they prefer an approach where their system creates a file that’s sent to the bank, the IT investment would be much smaller, or perhaps nothing at all.
“Companies might first automate their payables — still use checks, but have the bank issue them — then gradually advance to an ACH or commercial card. The important thing to remember is that the benefits from going electronic won’t take months to be realized. They can be achieved on Day One.”
To discuss how electronic payment options may make sense for your company, contact your Comerica Treasury Management Representative or Karen Hacker at 734-632-5528 or firstname.lastname@example.org.
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Protect Your Future
Control Your Company's Destiny: Tips for protecting your financial, organizational future
While large corporations typically have employee progression and succession plans in place, smaller, middle market companies can encounter tricky family relationships when it comes to deciding who will run the business.
Likewise, while corporations offer wealth management and tax planning assistance, smaller companies might decline or defer these benefits, choosing instead to focus on running the business.
Tom Seck, National Director of Comerica Bank’s Business Owner Advisory Group, recommends that middle market companies take the following steps to sustain their financial and organizational well-being:
Protect Your Wealth
Many successful middle market business owners have accumulated a sizeable estate by the time they retire and want as much of that wealth as possible to be retained by their heirs or business. This is a daunting scenario, considering that even with a $5.34 million per person federal estate tax exemption, the balance of an estate can be taxed at a rate of 40 percent.*
“Our clients have put their lives’ work into building their businesses and don’t want to see them bankrupted by taxes after they’re gone,” Seck says. “You and your adviser should consider sophisticated wealth transfer techniques and advanced estate planning using complex trusts, family LLCs, and limited partnership strategies to substantially reduce estate tax liabilities.”
Draft a Buy-Sell Agreement
A buy-sell agreement prepared by an attorney serves as a road map for the orderly transfer of ownership of interests (to whom, at what price, etc.) in the event of the owner’s death, retirement, disability or other triggering events. It can also protect the interests of minority owners, establish a method of determining a company’s value, and ensure that the wrong person doesn’t become the next owner by default.
“Far too many businesses fail not because of the burden of estate taxes, but because of the chaos that can result if they are not prepared for the loss of an owner or the emergence of a new owner who is incompatible with company culture or strategy,” Seck says. “You don’t want people coming in the next day wondering, ‘Who’s the boss?’ ”
Plan for Management Succession
Just as important as ownership when structuring a family business is having the right people ready to assume key management roles.
“Not all kids are created equal,” Seck says. “Some can be the CEO, others can be the marketing whiz, and some don’t have the interest or aptitude to be in upper management. Your succession plan should identify and hone managers who can jump in with their young spirit and entrepreneurial ability and move the business forward.”
When personal quarrels interfere with running a business, Seck recommends convening a family meeting to air grievances, attempt to diminish friction, and allocate decision-making based on individual strengths. If a neutral voice is needed, Seck suggests engaging the services of a family counselor, a trusted colleague, or a company board member.
Diversify Your Investments
Many business owners forgo investing in the stock market, preferring to plow extra cash into tangible assets like real estate or the relative certainty of their own operations. “It’s very difficult to convince someone who is confident in his or her entrepreneurial ability to make money and get returns of 10 percent to 15 percent to go into the stock market where no one knows the future,” Seck says.
Nevertheless, it is critical that one’s investment strategy provide enough diversity and liquidity to protect the interests of the business and its owner(s) from unseen perils. “Investments must be balanced, with a portion able to be monetized immediately in case ready cash is needed to pay estate taxes or to keep the company afloat in an economic downturn,” Seck says. “You should at least have an insurance policy that provides cash for the business in the event of a death.”
While middle market business owners are very capable of growing their core businesses, Seck says, they often don’t take the steps to properly structure their organizations. “The proper wealth transfer, succession, investment, and tax planning can protect a company and its assets by catching issues that often fall through the cracks,” he says, “and that can save a business from an early demise.”
To learn more about Comerica’s Business Owner Advisory Services, contact Tom Seck at 714-435-3952 or email@example.com.
* Effective as of 2014. The maximum exemption may be increased or decreased due to changes in United States tax law.
Comerica Wealth Management consists of various divisions and affiliates of Comerica Bank, including Comerica Bank & Trust, National Association; World Asset Management, Inc.; Wilson, Kemp & Associates, Inc.; Comerica Securities, Inc.; and Comerica Insurance Services, Inc. and its affiliated insurance agencies. World Asset Management, Inc., Wilson, Kemp, & Associates, Inc., and Comerica Securities, Inc. are federally registered investment advisors. Registrations do not imply a certain level of skill or training. Comerica Bank and its affiliates do not provide tax or legal advice. Please consult a tax or legal advisor regarding any tax or legal issues.
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Entrepreneurial Desperation: Organic growth comes from within
What do agriculture and middle market businesses have in common? Both need organic growth to succeed. Organic growth occurs when management applies its highest levels of creativity and expertise to getting to know the customer, product development, marketing, and sales — all with the intent to increase revenues. Growth that results from takeovers, mergers, or acquisitions can create enterprise value, but is not considered organic.
Critical to Success
For a middle market business, organic growth can be the foremost driver of value. “Organic growth is a critical success factor because it drives so many other benefits, from investor confidence to employee satisfaction to job creation,” says John Fletcher, managing partner at Fletcher Spaght Inc., a strategic consulting and venture capital firm in Boston. “Also, whether they are publicly or privately held, companies that show robust and sustained organic growth have higher valuation multiples.”
While the right combination of product, geographic territory, distribution channels, marketing, training, compensation, and trusting relationships with customers can contribute to a company’s growth, Fletcher says high-performing executives must be deeply involved in seeking fresh ways to serve existing customers and win new ones. “The first step is to conduct a ‘growth audit’ that takes a hard look at the company’s current and potential business,” Fletcher says. “To have sustained growth, you must find ways to gain share in your current market, win new customers with whom you and your competition are not engaged but who are theoretically in your addressable market, and seek ways to expand your business.”
Fletcher suggests that companies explore “adjacent markets” that leverage their manufacturing or sales and marketing expertise. For example, a men’s suit manufacturer might move into the adjacent marketplace for shirts, ties, and slacks. If its sales force has strong relationships in the industry, pursuing an adjacent market for retail inventory control systems might make sense. The company can also engage in variations of its core business, known as forward and reverse integration, by selling bolts of material to custom suit makers or becoming a suit retailer itself.
For most middle market companies, understanding how they first attracted and retained customers is a no-brainer. Effectively seeking new business and competing in adjacent markets, by integration or by any other method, is another story.
“Very few companies think rigorously about what are the requirements to win that business,” Fletcher says. “It may not be just about the product; it may be about service, price, training, distribution channels, or awareness. The customer may not even know that you exist.”
Reaching the ‘Non-Customer’
When companies are asked how they plan to achieve organic growth, they typically reply that they simply respond to the “Voice of the Customer.” These listening posts today include reviews posted on company websites and social media channels as well as traditional focus groups and customer advisory boards. While these methods provide important feedback, Fletcher says they also can lead to diminishing returns. He sees more value in listening to the “Voice of the Non-Customer.”
“Did we have a chance to sell to non-customers? If yes, we need to know exactly why we lost and if they are satisfied with their decision,” Fletcher says. “If we didn’t have a chance to compete, that’s a big problem as well, and you have to find out why.
“Some non-customers may not be aware of your product, it may not be exactly what they want, or the pricing may not be right. These people are part of the addressable market, so shame on the company who doesn’t figure out how to do business with them.”
Fletcher warns middle market business owners against falling into the trap of running their companies from their office, through their staff, or by relying on their “best” customers.
“The opportunity for revenue growth is outside the company,” he says. “Top executives need to regularly join their sales staff in the field to stay connected to customers and non-customers.”
Above all, executives must instill a culture of “entrepreneurial desperation” in their organizations.
“Your attitude must be like the startup company that was born in a garage and is desperately seeking its first customer,” Fletcher says. “One of the key drivers of organic growth is a company culture that maintains that desperation in the boardroom, across its executive team, and among those in the field.”
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