Advice and information to help you manage your business

the LEADING

RAISEPROFITSBOOST BOTTOM LINE WITH FRESH PERSPECTIVE TO WORK SMARTER

VOLUME 5 ■ ISSUE 3 ■ 2005

PLUS:Don’t jump—plan before starting a business

Cultivate civic-minded business, caring employees

PUBLISHED BY Pannell Kerr Forster of Texas, P.C.

2 VOLUME 5 ■ ISSUE 3 ■ 2005

Dear Friends and Colleagues:

Welcome to the spring 2005 issue of The Leading Edge, PKF Texas’ forum for timely, dynamic information to help grow your business and compete in the business marketplace.

This is my first message as president of PKF Texas, having just recently taken over from Warren Cole. Warren has been my mentor and friend for more than 25 years. He has presided over a period of unprecedented growth for our firm—his are not easy shoes to fill. Warren will continue to lead our Litigation Consulting Services practice group and we will all benefit from his continued guidance and counsel.

From time to time, I will use this forum to announce other changes within the firm. For example, we are pleased and proud to announce Karen Love, our director of Practice Growth, became an owner in our firm on Jan. 1, 2005.

The content in each publication is driven through an editorial board made up of managers, directors and other PKF Texas team members. This group meets four times annually to strategize on topics of interest and develop stories based on the content in the “universal section,” or the feature stories provided by The Leading Edge Alliance. Our story on process mapping by Victoria Richardson is a direct complement to the larger story on profit enhancement in this issue. Similarly, the feature story on volun-teerism in the office is localized through our story on how PKF Texas takes its commit-ment to our community very seriously. We hope the story of our team’s volunteer spirit encourages you to get involved in the community as well.

From time to time, we also include stories that address business issues and topics that reflect the spirit and vitality of the greater Houston area; our story on business plan competitions is one such story. When we began exploring various competitions in local colleges, we were amazed to discover the scope and tremendous influence these programs have on students, start-ups and even established businesses. Not only are the competitions good for the future of the businesses and business owners, but they also serve as a great exercise in growth opportunities for the students.

This issue also marks the third time we have written one of the universal stories. “10 Practical Tax Planning Techniques,” written by Eddie Goldsberry and Anjana Jackson, addresses unique tax planning strategies that go beyond tax shelters and other traditional methods.

Please let us know how we’re doing with The Leading Edge or any other matter by calling our office, or sending me an e-mail to kguidry@pkftexas.com. I’d love to hear from you.

Kenneth J. Guidry, CPAPresident

Audit and Accounting

• Audits, reviews and compilations• Transaction services• Evaluation and implementation of internal

control systems• Employee benefit plan audits• Systems consulting• Mergers and acquisitions• Special agreed-upon procedures• Operational Audits• Forensic Accounting / Fraud Investigations

Business Process Consulting

• eCommerce strategy consulting and implementation• Operational process improvement• Entrepreneurial planning and business

plan development• Business process measurement• Valuation services

Entrepreneurial Solutions

• Healthy Start Package for business start-ups• Profit Enhancement Plus• Outsourced controller & CFO• Cash flow management• Payroll processing • Accounting software support

Information Technology Consulting

• Application software selection assistance• Business system design and implementation• Hardware selection and implementation• Network infrastructure evaluation and

implementation

Litigation and Insolvency

• Bankruptcy and insolvency consulting• Insurance claims• Intellectual property disputes• Divorce proceedings• Lost profits• Accounting malpractice• Tax controversies

Tax

• Federal, state and local planning and compliance• Outsourced corporate tax services• Research and development tax planning• Cost segment analysis and accounting for buildings

and manufacturing facilities• Tax controversy management and resolution• Estate, gift and tax trust planning• Business succession planning

International Tax

• Global tax minimization planning and implementation

• Tax advantages for exporters• Transfer pricing studies and planning• Withholding tax compliance and planning for

cross-border payments• Income and estate planning and compliance for

resident and non-resident aliens• US expatriate individual income taxation

www.pkftexas.com

Menu of Services

VOLUME 5 ISSUE 3

2005

The Leading Edge

3THE LEADING EDGE

The Leading Edgewww.LeadingEdgeAlliance.com

The Leading Edge Alliance is an international organization of large, independently owned accounting and consulting firms. Our members are top-quality firms from around the country with deep client relationships and strong ties to the community.

Alliance firms provide their clients with an unbeatable combination: the comprehensive size and scope of a large national company, along with the continuity, consistency and quality service of a local firm.

With 47 member firms ranging in size from $7 million in revenue to more than $40 mil-lion, the combined revenues of Leading Edge Alliance firms total more than $650 million with more than 4,000 staff. Fifteen are in the top 100 of accounting firms. Many of the participating managing partners have estab-lished themselves as leaders in the public accounting profession; others are emerging as the trendsetters and trailblazers for the future of public accounting.

Leading Edge Advisory Committee

Linda Watson

Brady Ware

Kerry Pascetta

CCR Group

Leisa Gill

Lattimore Black Morgan & Cain, P.C.

Marshall Lehman

Lurie Besikof Lapidus & Co., LLP

Raissa Evans

Pannell Kerr Forster of Texas, P.C.

Elizabeth Reed

Postlethwaite & Netterville

Karen Kehl-Rose

The Leading Edge Alliance

in affiliation withCustom Publishing Group (CPG)

Ann M. Gynn

Editor

Amanda Horvath

Art Director

Stacy Vickroy, Trishia Karsnak

Graphic Designers

Custom Publishing Group (CPG)

Editorial & Design Services

The Leading Edge is published quarterly by Custom Publishing Group, 812 Huron Road, Suite 201, Cleveland, Ohio, 44115, (216) 523-1212, FAX (216) 241-5458. Periodicals postage paid at Cleveland, Ohio.

VOLUME 5 ■ ISSUE 3 ■ 2005

the LEADING

contents

features

4 COVER: Profit Enhancement Boost your bottom line with a fresh perspective to work smarter

13 Volunteerism in the office Cultivate civic-minded business and caring employees

14 Want to start a business? Don’t just jump–think, plan and realize

departments

7 Technology’s future brings perks, new power requirements to business

8 Employees play greater role in health care costs

16 12 practical tax planning techniques

18 Client Edge:

Professional Sales Associates Inc.

19 The Leading Edge Alliance Members

THE LEADING EDGE

Winner 2004 AGD award for publication design

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4 VOLUME 5 ■ ISSUE 3 ■ 2005

5THE LEADING EDGE

PROFIT ENHANCEMENT:

For years Tru-Cut Inc. employees would ask, “How’s the company doing?” when executive Dave Gano

walked the floor.Today, Gano rarely hears the question. If he does,

the response is always the same, “You tell me.” In 1999, Tru-Cut faced an uncertain future. The

tool-and-die manufacturer had just closed down its special equipment manufacturing division. Two re-engineered divisions, stamping solutions and post-production services, remained.

Gano was implementing lots of changes—includ-ing open book management, so everyone would know exactly how the company was doing. “We just turned the whole company upside down,” he says.

Whether confronting troubled operations, discov-ering too many surprises that are hurting the bottom line, seeing profits drop while revenues remain the same or grow, or simply wanting to increase profits, more companies are embracing a new perspective on looking at the bottom line. Profit enhancement is what it’s all about, experts say.

“Efficiency isn’t enough anymore,” says Carol McNerney, a director at SS&G Financial Services, a Leading Edge Alliance firm, which advises Tru-Cut. “It’s the extras that you bring to the table. Today’s environment is so competitive.”

The question is not as simple as asking, “How can we make more money?,” according to Bob Charron, managing partner of Carlin, Charron & Rosen, a Leading Edge Alliance firm. “Ask more specific questions.”

Donny Kretschmar, a director at Leading Edge Alliance firm Henry & Horne, says, “It’s not just what you do every day, but how you work smarter. Everyone needs this no matter how big or small.”

The profit enhancement poster child Byron Hebert, a director of Leading Edge Alliance firm PKF Texas, says he worked with the “poster child” cli-

ent who followed the profit enhancement path.The owner of an elevator manufacturing compa-

ny became concerned when the formerly profitable company saw its revenue flatlining or increasing marginally but found its profits eroding. On-time delivery was a concern, the owner told Hebert. But he wasn’t sure how much it was costing the company.

So Hebert conducted a profit enhancement evalu-ation. He says that while the problem cutting into profits was on-time delivery, a systemic evaluation was needed—reviewing the process from the time the phone rang confirming the order to the time the product was installed.

What the investigation revealed, Hebert says, is that the sales department was promising unreal-istic deadlines. The process then was complicated by design engineers who wanted to add bells and whistles. They often would send unfinished designs to production and told them to begin work while waiting for the final design. “However, a click-and-drag change by the design engineer on the computer might takes minutes, the change might take a half day in the shop,” Hebert says.

When the elevators went out, they frequently were incomplete and required adjustments to be made on site. With an international clientele, the cost of sending employees to finish the work was costly.

Hebert says bringing a “fresh set of eyes” with “no political motive” offered him a chance to see exactly what the company was doing to identify the breakdowns that caused the late and unprofitable deliveries.

In the end, the sales department agreed to give cli-ents deadlines set by the engineers and manufactur-ers. The company did not have to lay anyone off. The bottom line also saw a nice boost. Post-review, profits jumped approximately five times, Hebert says.

The pain factor leads to changeFor Tru-Cut’s Gano, prof-its were enhanced after he decided he could not bear the pain anymore of following an old business model. “I didn’t want anything to do with it,” he says of the closed approach begun with the company in 1968 that deemed only a few people understand the com-pany’s full financial picture.

“All the financial data was held close. Now we have Accounting 101 for all employees,” he says. The 10-week interactive course is designed to help employees understand how the financials work.

The educational process doesn’t end there. Employees are updated at weekly meetings in each of their divisions. Once a month, Gano hosts a “huddle” meeting to bring everyone together. He tells them the good and the bad. The idea, Gano says, is to engage all employees in identifying potential solutions.

Each division does its own sales and marketing. Meeting and exceeding the goals they set allow them to share in the distribution of profits.

Gano says he knows the open-book, take-respon-sibility-for-your-own work approach is not the best fit for everyone. When it started in 1999, some people decided it wasn’t for them and left. “They didn’t want to learn something new,” he says.

But Gano never looked back. When processes are explained and quantified, it gives people a much bet-ter handle on their role in the company. “They’re driv-ing with their eyes open instead of closed,” he says.

Almost six years later, Gano says profits are up and business is growing. In addition, the commu-nity is more aware of Tru-Cut and its approach to business. “In the last couple months, in interviews, more people are mentioning they have heard about Tru-Cut,” he says.

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continued on next page

OUTSIDE PROFESSIONAL EYES OFFER FRESH PERSPECTIVE OF PROCESSES, PRACTICAL WAYS TO IMPROVE BOTTOM LINE BY ANN M. GYNN

VOLUME 5 ■ ISSUE 3 ■ 2005

The renaissance, as Gano calls his profit enhance-ment process, resulted in reduced overhead and inventory, which increased revenue and made profit-ability greater. It’s a process he thinks all companies should consider.

“Just do it,” he says. “Don’t delay any longer.”

Put it on your to-do listCCR’s Charron, who has made profit enhancement his specialty for the last eight years, says there are many ways to implement a review and resulting recommendations.

No matter which way is chosen, though, Charron says it’s a commitment to the strategy that sustains the growth.

“The prime challenge is to focus,” he says. “Business life is so complicated. People in charge find their time in demand on so many fronts. They’re constantly putting out fires. The immediate to-do list only grows.”

However, without taking time to look at the overall picture, profits are likely to dip. “To be truly effective, profit enhancement must be part of the firm culture,” Charron says. As managing partner of CCR, he has his own method to remind him of the firm’s purpose.

A tray that holds 36 index cards sits on his desk. Each slot is staggered so he can see all the cards with only a glimpse. On each card is a message that usu-

ally might get lost in the hectic business day. “Get those profits up!” is emblazoned on one card.

“I must look at them 100 times a day,” Charron says.

SS&G Financial Services’ McNerney agrees that the tone for the profit enhancement culture must come from the top. “Hear new ways of doing things. Generate creativity,” she says. “Be open minded to new ideas and change.”

In previous years, embracing change and opening up the culture was easier for smaller companies than it was for larger companies. But the implementa-tion of the Sarbanes-Oxley Act, which requires more accountability by public companies, has created an opportunity for larger companies to rethink their cul-tures and operation if they are open minded enough, McNerney says.

“The most important thing to understand is that the way you’re doing things now isn’t the only way,” she says. “Consider the opportunities. You can’t be content with the status quo.”

Review from inside outHebert of PKF Texas says profit enhancement advi-sors will review thoroughly a company’s situation often before stepping inside to evaluate the par-ticular business. They will examine changes in profit margins, analyze financials, and review industry standards and trends for the last five years. “We have an idea what’s up before we go on site,” he says.

For example, one company may have a 111-day accounts receivable collection cycle but the industry standard is 80 days. With $1 million in receivables, that 31-day delay can have a significant effect on the company’s cash flow.

Process mapping is another tool that may be used in a profit enhancement engagement. “You may uncover something that the owner didn’t know was happening,” Hebert says. For example, perhaps the accounts receiv-able department is still giving rebates to a client whose rebates expired six months ago—but no one told accounts receivable to make the necessary changes, indicating a procedure breakdown in the company.

Charron says an investigation may show that sales tax increased to 8 percent, but the company still is collecting 7 percent from customers. The uncollected 1 percent is coming directly from the company’s pock-etbook. Or perhaps payroll taxes are being submitted late and the company has to pay the stiff penalties.

“When you walk through the process, you can uncover things that have been going on for years,” Hebert says.

An important component of any review is ask-ing employees for input and assuring them that the conversations are confidential. “Be candid,” Hebert tells employees.

He explains that employees might tell outside advisors of problems that they may not tell the owner for fear of getting into trouble.

He also stresses the need for the development of key performance indicators. “You can’t manage what you can’t measure,” Hebert says.

Dollars and piece of mind Owners and executives who think their guts are telling them something is wrong in the company, who find sur-prises keep popping up that hurt the business or who stay awake at night worrying about the company all can find comfort with a profit enhancement review and recommendation implementation, Kretschmar says.

“They give owners piece of mind,” he says. Frequently, executives are not as familiar with the processes and day-to-day details of operation. “They’re looking at such a high level. They’re look-ing at a balance sheet. But even a bad controller can make numbers look OK.

“The poisons are in the details.”Kretschmar, who developed a CPA Tuneup® seven

years ago, says the evaluation really is all about process from the lowest levels. “We spend a lot of time there, not just on financials but we try to find out where the problem is that’s ultimately leading to the lost money,” he says. Perhaps it’s a receivable buried in a liability that is written off because no one ever addressed it.

Financial statements and balance sheets serve as a great foundational resource for investigation. “We dig into the financials. In accounting everything has a home. Perhaps we find something that’s a symptom of a procedural problem. We’ll go deeper and find why the accounting ended up in the wrong spot,” Kretschmar says.

“What you don’t know will kill you.”Kretschmar says management ultimately receives

a letter that not only highlights the problems discov-ered but why they exist and what needs to be done to fix them.

The post-review conversations can be tough, Hebert says. But he finds the presentation goes more smoothly when you can quantify what the compa-ny’s profit and financial picture would look like if the company makes certain changes.

Kretschmar agrees. “Once management understands the importance, they’re hooked for life,” he says. e

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6

PROFIT ENHANCEMENTcontinued from previous page

NOT A ONE-TIME EVENTThe experts say that the profit enhance-

ment process never should end with the investigation report submission. Reviews should be conducted at intervals such as six and 12 months. Ongoing maintenance modes also should be established.

Realize that creating a profit enhancement culture takes time. Employees may have to hear the message two or three times before they implement all the changes. e

THE LEADING EDGETHE LEADING EDGE 7

As you work on a spreadsheet, you realize you need data from a co-worker down the hall. With

the report due in a matter of minutes, you type an instant message asking for the information. As you continue to enter numbers on the spreadsheet on one monitor, the instant message reply pops up on the second monitor on your desk. With a few clicks, you transfer the data to the spreadsheet—without ever having to minimize a screen.

More frequent use of instant messaging in the office and dual computer screens on the same desk are two highlights of what’s happening in 2005 with technology.

“Instant messaging in the workplace is going to be huge,” says Jeff Locketz, a partner with Leading Edge Alliance firm Lurie Besikof Lapidus & Company. “It will overtake e-mail.”

In addition, instant messaging enables managers to see who is online even if they’re 1,000 miles away, he says. It’s all part of the growth of the virtual office.

Dual computer screens are another impending trend, says Jeff McCulloch, president of Yeo & Yeo Computer Consulting, a Leading Edge Alliance-related company.

The dramatically falling price of glass in Asia mar-kets is enabling the change, he notes. The reduction in costs means computer monitors are cheaper to make, thus opening up the opportunities for office users to benefit from two monitors on the same desk.

`”For anybody in an environment who’s always try-ing to scrunch screens, it’s great,” McCulloch says.

No more minimizing and maximizing or opening and closing files to input data from one document to another, he explains.

In addition, computer users no longer will have to turn around their single computer screen for a cli-ent to see. Instead, the client can look at the second screen to see exactly what’s being entered and how the results appear.

Yeo & Yeo is conducting a dual monitor trial run in its tax department. The staff can read supporting documents on the left screen, then drop and drag the information onto the right screen—plugging it in where it’s needed. “It saves minutes from opening a new file,” McCulloch says.

“Our staff is excited about the new dual moni-tors,” he adds.

By 2006, McCulloch expects most Yeo & Yeo users to have two monitors on their desk. Employees are finding such satisfaction and the pricing is so much more affordable today, he says.

“The payback time is real quick,” McCulloch adds.Glass prices have affected the market significantly. For

example, a monitor priced at $400 last June was $300 only six months later. That’s a 25-percent drop and the market is constantly changing, McCulloch says.

A CRT monitor could be as inexpensive as $100, with nice ones costing about $120, McCulloch says. Low-end flat screen monitors currently are around $200.

In addition to the monitors, the only cost for dual screen implementation is perhaps an additional video card for a desktop computer, McCulloch says. Laptop computers already have the capability to use two screens. In addition, operating system software such as Windows XP has the necessary technology built in for dual display.

With all the advances in technology to increase ease of use, Locketz says the No. 1 concern for infor-mation technology departments this year continues to be security and will be for years to come.

“Disaster recovery, building internal hot sites in different geographical areas and business continuity planning are all at the top of the list,” Locketz says.

Also, many businesses soon may be confronted with the power and cooling challenges presented with all these technological advances, he says. With more equipment packaged in smaller spaces, the demand for greater wattage per square foot and higher levels of cooling will exist.

So when digitizing data to reduce the cost of stor-ing all that information, thought also should be given to the constraints of the data centers. Companies should evaluate the necessary watts per square foot, the air conditioning required and whether data cen-ters are electrically wired to provide such support, Locketz says.

“The power requirements are phenomenal,” he says. e

Technology’s future brings perks, new power requirements to business

The American Institute of Certified Public Accountants offers this emerging tech watch list for 2005. Its task force believes that these hot technologies may not be viable commercially this year but show promise in two to three years.

1 Radio Frequency Identification (RFID)—

Silicon chips and an antenna transmit data to a wireless receiver that can track everything from soda cans to cereal boxes.

2 Search—Companies like Google, Apple and Microsoft are developing their resources to explore new ways to identify digital files that do not require wading through directories of folders.

3 Fuel cells—Methanol-powered fuel cells could be an alternative to aging battery tech-nology, completing the wireless puzzle.

4Digital home—Further blur of the line between digital home and the office through 902.11 cameras monitoring the office after hours or at home during the day, and 42-inch plasma screens popping up in conference and living rooms.

5 Display technology—Higher resolution, smaller devices with lower power consump-tions will be on the market. Televisions and computer monitors will become one and the same. e

TOP 5 TO WATCH

technology

8 VOLUME 5 ■ ISSUE 3 ■ 2005

More companies are responding to the escalating cost of health care by involving their employees

more in the process.“There’s a shift to consumerism in health care,” says

Tim Schmidt, a partner at Lurie, Besikof Lapidus & Company, a Leading Edge Alliance firm. “Employers are having to share (the cost) with employees. They can’t absorb it all.

“The costs need to be shared more and companies have shifted more of the responsibility to employees.”

Lari Braun, human resource manager of Henry & Horne, a Leading Edge Alliance firm, agrees with Schmidt. She says that offering health care benefits still is expected by most employees.

However, companies are working more to inform their employees of factors affecting health care and related costs than they have in the past. “It’s a well-ness aspect and it’s employee education. There’s tons of information,” Braun says.

“There’s been a shift to consumerism—shop-ping for physicians, pharmaceuticals and hospitals,”

Schmidt says.A recent study by the International Society for

Certified Employee Benefits Specialists and Deloitte Consulting LLP supports that. Of the nearly 350 survey participants:

• 90 percent say controlling health care benefit costs is their No. 1 priority.

• 83 percent say they increased or planned to increase employee cost-sharing in health and welfare programs.

• 72 percent increased the emphasis on consumer-ism for employee health and welfare programs.

• 85 percent have or will focus on increasing employee communication and education efforts.

Braun says that part of the education at her firm is making sure employees understand when they should see a doctor rather than rushing to the emergency room for a non-emergency. “We also stress that the reason for health insurance really is not day-to-day

health care but for catastrophic events,” she adds.Employees also are given more details about plan

options, total costs and benefits, Braun says. During open enrollment periods, employees are given a spreadsheet detailing that data, which is available year round on the Internet.

“They appreciate knowing the value,” Braun says, noting the participation rate in the plan is high.

With a greater understanding of their benefits, employees are taking a more active role in consciously making health care decisions. For example, when Henry & Horne raised the co-pay for the pharmacy benefits, more employees considered the benefits of using generic drugs than had done so in the past.

With health care costs escalating across the board, there are not a lot of vehicles to take out the bite, Schmidt says. However, there are options that allow the company and the employees to make a decision in how they want to pay for health care. Cafeteria, flex, HMO, and high-deductible plans are a few of those options.

Beginning Jan. 1, 2004, Health Savings Accounts (HSAs) may be set up to allow individuals and employees, through an employer’s caf-eteria plan, to make pre-tax contributions of up to $2,600 annually ($5,150 for families) to cover health care costs, to high-deductible health insur-ance plans. Money put into an HSA used by a beneficiary

for qualified medical expenses is not included in that person’s gross income. A high-deductible health plan is one that has at least a $1,000 annual deductible for individuals, and a $2,000 deductible for family coverage. In addition, annual out-of-pocket expens-es paid under the plan must be limited to $5,000 for individuals and $10,000 for families. Such expenses include the deductibles, co-payments and amounts other than the premiums that must be paid for plan benefits.

“They’re a more attractive savings/tax feature than the Medical Savings Account (MSA), which was rarely used and frequently cumbersome,” Schmidt says.

In the long run, he says, some companies may get out of the health care business. Instead, they will offer employees a set annual amount for health care and allow the employees to go on the open market and pick their own plans. e

strategic

Employees play greater role in health care costs

“There’s been a shift to consumerism—shopping for physicians, pharmaceuticals and hospitals.”—TIM SCHMIDT

9THE LEADING EDGE

VOLUME 5 ■ ISSUE 3 ■ 2005

the LEADING Certified Public Accountants & Professional Advisors

Pannell Kerr Forster of Texas, P.C.

By Victoria Richardson, CPA

Attesting that a set of financial statements is free from material

misstatement. Filing our client’s tax returns. Helping clients streamline their business by a series of process improve-ment activities. Whoa! That last service doesn’t sound like an accounting firm’s typical service, does it?

While “process improvement” often seems like one of those services you hear about from large consulting firms or multi-billion dollar global compa-nies, it’s something often done with a similarly intensive focus by accounting firms, including PKF Texas.

Many companies often fall under the trap of doing things “the way they know how to do it” because it’s all they know and it’s the way someone else taught them how to do it. More impor-tantly, it works for them.

That’s where process improvement activities come into play—specifically through an exercise called “process map-ping.” If you stop to look at a business, it really comprises a conglomeration of many sub-processes. Each sub-process is directly connected to another sub-process, kind of like a chain. This is a common feature among large and small businesses alike, so why shouldn’t small-er companies benefit from improving the way they run their everyday processes?

A process improvement engagement begins with identifying the main, high-level processes of a company and those that are common to most businesses: sales, billing, cash management, pro-curement and accounting close cycles. After identifying the main processes, we then start to evaluate these processes. Listening to upper and middle manage-ment often leads to an indication that there may be a problem with one or more of the processes. Phrases like “it takes us forever to close the books,” or “we don’t have much confidence in our

inventory numbers until we do a physi-cal count” are red flags. These are the areas that may benefit from a process mapping exercise.

The next step is actually mapping the current-state processes. This exercise is composed of conducting interviews and mapping the process in a flowchart format. There are several flowcharting programs on the market, but one of the most commonly used programs is Microsoft Visio. After conducting the ini-tial interviews and drafting the process flowcharts, it helps to revisit the process with the people you interviewed. This ensures you included all the steps, and the steps you documented are correct.

After mapping the processes, it’s time to analyze the current-state process flowcharts to identify critical areas, duplicate activities or discover opportu-nities to streamline steps in the overall process. Things to look for are “loops” in your flowchart, or activities that are being performed several times. In addi-tion, risky steps that could compromise the entire process should be highlight-ed and examined to ensure that enough

controls are in place to help minimize the risk of a procedural breakdown.

At this point, facilitating a joint-ses-sion with all the people involved in a particular process is an important next step. In these sessions, going through the current-state processes help validate, again, that no important steps were left out. In addition, seeing the entire pro-cess in a flowchart format should illus-trate how each person’s activities affect the process as a whole and should help them brainstorm together to find areas they can do differently and smarter.

While you would think the next step would be to propose solutions to the inefficiencies that surfaced, past experi-ences show that when an outsider comes in and tries to mandate changes, employ-ees are going to be much more reluctant to change how they perform their rou-tine activities. A key change manage-ment activity is to gain employee buy-in from the very beginning and retain it through the development of the solution. Facilitating the discussions that lead to the drafting of a better, more efficient “future-state” process by the employees themselves increases the chance that the employees will adopt the changes. The employees will feel as though they were responsible for determining the ultimate solution and will naturally feel more ownership of the new process.

By performing these activities, you may not realize it, but you have helped improve your client’s business by help-ing streamline inefficient processes. You have helped everyone gain a much greater sense of ownership and pride regarding the new future-state process, and in turn, given them a renewed sense of importance. e

Victoria Richardson, CPA, is a senior consul-tant with PKF Texas’ Entrepreneurial Advisory Services Group. Contact her at (713) 860-1479 or vrichardson@pkftexas.com.

The process of improving business

VOLUME 5 ISSUE 3

2005

The Leading Edge

10 VOLUME 5 ■ ISSUE 3 ■ 2005

pkf texas

While Donald Trump’s “The Apprentice” may be a popular showcase for

would-be entrepreneurs and business mar-keters, the program’s format lends itself to a unique study of how to retain customers, sustain profits and plan for growth—all factors many companies and organiza-tions should be paying attention to, but perhaps aren’t doing so on a continuous, intensive effort.

Having a solid business plan sup-ports all three of these concepts, but the plan must function in the real world with measurable and obtainable goals.

Recognizing how they can assist organizations with this process and pro-vide guidance in academic endeavors, two local colleges hold various business plan competitions for area businesses and/or students to learn how a plan can truly benefit the future. As a firm that works with a diverse number of clients in business start-ups and entrepreneur-ial services, PKF Texas strongly sup-ports each of these competitions.

“Most companies like to put their best foot forward and profess an entre-preneurial spirit to their own employ-ees and the markets they serve,” says Ken Jones, a lecturer and director of the Center for Entrepreneurship Management, Marketing and Business Administration Department, College of Business at the University of Houston Downtown. Although the University of Houston does not have its own compe-tition, Jones says the college strongly supports its students to enter other area competitions. “Sponsorships of events such as these reinforce that sort of mes-sage and elevates this entrepreneurial efforts within their own organizations.”

We asked the heads of competitions at Rice University and Texas A&M University to tell us about their competitions and how they benefit an organization:

• Brad Burke is manag-ing director of the Rice Alliance for Technology & Entrepreneurship (www.alliance.rice.edu).

Liz Crawford manages the program and its found-

ing director is Dr. Steve Currall.

Business plan competitions instruct, educate and train leaders

• Richard M. Scruggs is director of the Center for New Ventures and Entrepreneurship at

Mays Business School, Texas A&M University

(http://business.tamu.edu).

PKF Texas: Tell us about your college’s competition.Brad Burke: The Rice Business Plan Competition is intended to simulate the real-world process of entrepreneurs soliciting start-up funds from early-stage investors and venture capital firms. The judges function as venture capital investors deciding on which business venture they would most likely fund. The quality of the idea, the strength of the management team, and the clarity and persuasiveness of the written plan and oral presentation, all influence the judges’ decisions. Ultimately, the win-ning team should be the team in which

the judges would most likely invest their money.

There is no specific focus in the type of companies or industries. Past winners of our competition have come from a variety of industries and mar-kets, including biotechnology, consum-er products, media and entertainment, information technology, retail, ener-gy and financial services. The quality of the idea, viability of the business model, attractiveness of the investment have played a larger role in determining the winner than the type of business.

Richard Scruggs: Three years ago, the center changed the focus of its business plan competition. Rather than hosting a competition that engaged only a few MBA students from any one school, we created a competition that involved 100 percent of A&M’s MBA class. We believed that all students could and should benefit from participating in

such a competition. In 2002, we hosted the first MBA Tech Transfer Challenge. The 2005 event was in February. Each year, about 130 judges from the Texas business and academic community serve as judges for the event.

The event is a required part of the first-year MBA curriculum. The MBA class is divided into teams of four or five students who work together for one week. On the first day, each team is assigned a Texas A&M-developed invention. The teams have one week to learn about the invention, identify potential applications of the technology, assess the market and develop a conclusion about the market viability of the invention. The team’s work and conclusion are summarized in a written report and oral presentation. On the last day of the challenge, each team makes a presentation in the morn-ing to a panel of 30 judges. Each panel then selects one team to advance to the finals. The finals are held in the afternoon on the last day of the challenge. During the final round, the teams present their results to the entire judging group (about 130 people) and their MBA peers (about 70). The winners are recognized and cash prizes are awarded at a networking reception at the end of the day.

PKF Texas: Tell me three factors it takes for a business plan competition to be suc-cessful. Brad Burke:1. Strong internal support from the

university—Support from faculty, administrators and staff is essential because it underscores the commit-ment of the university to supporting entrepreneurship.

2. Strong external support from the business community—Support of business leaders and successful entrepreneurs is key because they provide resources in the form of money (i.e., sponsorships), time as they volunteer to participate as judges and mentors to the partici-pants, and networking as they help emerging businesses gain traction in their industry.

continued on page 12

11THE LEADING EDGE

By Kenneth J. Guidry, CPA

With corporate scandals dominating the beginning of the 21st century,

a growing trend for corporate America is to refocus efforts to be good corporate citizens…encouraging and supporting volunteerism among its employees, sup-porting their efforts through contribu-tions of money and time to nonprofit and not-for-profit causes.

Corporate citizenship is good for charities and good for business.

According to a Trustees of Boston College 2003 “State of Corporate Citizenship” report, 82 percent of busi-nesses surveyed believe serving the community helps the bottom line and should be a priority. Nearly 75 per-cent think that the public has a right to expect good citizenship, and 80 percent believe corporate citizenship should be a voluntary endeavor with-out laws to govern the process.

PKF Texas strives to be an excellent corporate citizen. From our employ-ees’ first day with the firm, they are encouraged to get involved and volun-teer their time in some capacity. PKF Texas also motivates its team mem-bers by offering employee rewards for volunteering—such as T-shirt design competitions with cash prizes, kick-off parties, “jean days” and even paid time

Volunteer outreach provides benefits to community and PKF Texas

committees, and the BioHouston Chili Cookoff—an event in which many PKF Texas employees participated in plan-ning and competing in the event.

PKF Texas also is proud of the public recognition its volunteers receive for their efforts. For example, Warren Cole recent-ly received the J.B. and Blanche Earthman Award for his dedication to CanCare’s Ministry of Hope, and many other staff at the firm also are involved with churches, schools and alumni associations.

In addition to my service on the University of Houston’s Bauer College Accounting Advisory Board, many other PKF Texas staff serve as active members or participate on boards of various orga-nizations, including: • Greg Price—Rice Alliance, The

Texas A&M University Center for New Ventures & Entrepreneurship and Pine Forest Country Club

• Melissa Bland—University of Houston’s Accounting Advisory Board & Recruiting Subcommittee

• Del Walker—Texas A&M’s Business Plan Competition

• Eddie Goldsberry—Chair of the Houston Chapter of the Texas Society of CPA’s Charity Gala

• Karen Love—Board of MIT Enterprise Forum, encouraging entrepreneurial businesses, and the American Heart Association Public Advocacy Chair for the State of Texas

• Keddi LeBlanc and Michael Turner—Board of Hospitality Financial & Technology Professionals

• Rod Rodriguez—Hispanic Chamber of Commerce

• Rafael Carsalade—Brazilian Chamber of Commerce

• Sonia Freeman and Ross Walker—Clear Lake Chamber of Commerce How do companies define “good

corporate citizenship?” Based on Boston College’s survey, 87 percent say that operating with ethical business practic-es is very important, followed closely by treating employees well. Providing safe and reliable products, having a good environmental record and working to improve conditions in the community are also important.

Corporate citizenship is driven largely by internal corporate values and cus-tomer feedback. Research shows that 68

percent of all companies maintain for-mal corporate volunteer programs, and 66 percent maintain annual corporate volunteer events.

Some of the key components of cor-porate volunteer programs include hav-ing a mission or value statement for the firm, clearly defined goals and objectives for the program, dedicated resources, reward and recognition programs, and senior management support. PKF Texas has all of these components.

According to a recent research report by the Points of Light Foundation, an upward trend is occurring in workplace volunteering. The report found that almost 82 percent of responding corpo-rations focus their employee volunteer programs on core business functions, while 52 percent stress a commitment to community service in their corporate mission statement to help build a coop-erative corporate culture.

Moreover, 59 percent think that cor-porate citizenship improves image and reputation, 53 percent say it’s important to their customers, and 38 percent say corporate citizenship helps recruit and retain employees.

The Points of Light Foundation pro-vides useful information on how to begin organizing the volunteer effort. For example, Corporate Volunteer Councils are local coalitions of busi-nesses who either have employee and/or retiree volunteer programs, or are interested in initiating such programs within their companies. Managers from area companies come together to share information and ideas. For more infor-mation on CVCs, visit www.pointsofli-ght.org/networks/businesses/cvc.

The future looks bright for cor-porate citizenship, and it is expected that companies will adopt an increas-ingly comprehensive view that also includes the environment and com-munity engagement. To find a volun-teer center, call (800) volunteer or visit www.1-800-volunteer.org. For a free e-newsletter on workplace volunteer-ing (Corporate Connections), e-mail CVDinfor@pointsoflight.org. eAny of our PKF Texas team members mentioned in this article would be glad to share his or her experi-ences with you. Call us at (713) 860-4000 and we will put you in touch with the appropriate person.

off for those raising the most money for the charity of choice.

Not only does corporate volunteer-ism benefit the chosen charity or orga-nization; there are added benefits to the firm itself. Volunteerism strengthens work teams, builds employee skills and contributes to employee professional development. This impacts all levels within our firm—the enthusiasm is contagious and contributes a sense of community and corporate pride in our firm and in our marketplace

Research shows that top business-es succeed not just by following good business practices, but also by being good corporate citizens. When it comes to volunteering, PKF Texas takes great pride in our team’s efforts and results. We are involved in many volunteer pro-grams, the largest of which is the annu-al American Heart Association’s Heart Walk. The event, which has been a PKF Texas fund-raising event since 2002, has raised $19,000 in the past three years. Last year’s efforts raised $7,400 for AHA. In fact, the American Heart Association has used PKF Texas as a volunteer model for Houston-area participants.

Other successful volunteer pro-grams at PKF Texas include the Greater Houston Partnership, which has had firm team members on as many as 33

VOLUME 5 ■ ISSUE 3 ■ 2005

pkf texas

12

PKF Texas is pleased to announce…• Kenneth J. Guidry, CPA, has been

named president.• Byron M. Hebert, CPA, has been

promoted to practice leader of Entrepreneurial Solutions.

• Karen Love has been admitted to the ownership group.

PKF Texas founds Association for Accounting Marketing (AAM) Houston ChapterMember firm PKF Texas was instru-mental in forming the new chap-ter, along with a task force that included members of several Top 25 Houston firms. While a number of national members live and work in Texas, there has not been a regional chapter to assist in recruiting and supporting members until now. The first luncheon addressed the topic “Recognizing Trends in the Future of the Accounting Industry,” presented by Dr. Bala Dharan, the J. Howard Creekmore Professor of Management at the Jones School of Management Rice University, who discussed how the current climate in the business world affects supply and demand for accounting services.

As the only association in the country formed specifically to address the growing marketing needs of public accounting firms, AAM provides members with the infor-mation, resources and market intel-ligence needed to excel and grow in their careers. Formed in 1989, the members of AAM include marketing professionals, CPAs and consultants, vendors, educators and students who seek to expand the business of public accounting.

For more information about this event or about the Houston Chapter, please contact Raissa Evans at revans@pkftexas.com or (713) 860-1464.

Ultimately, the winning team should be the team in which the judges would most likely invest their money. –

Brad Burke

PKF Texas in the NewsHouston’s KHOU Channel 11 recently highlighted PKF Texas in one of its Up Close spots titled “Crunching the Numbers.” Kenneth Guidry, president, and several other team members were interviewed by KHOU’s Shern-Min Chow for the piece, which aired on Jan. 24, 2005. The news segment focused on the newly increased demands of accounting staffing, and how success-ful firms and universities work to gar-ner the best professionals. e

3. Strong event organization—A busi-ness plan competition is a compli-cated endeavor (logistical nightmare really) and requires an efficient team to produce a well run event.

Richard Scruggs:1. Student enthusiasm—Students need

to be passionate about their work. They must take it seriously and embrace the task. This interest and enthusiasm will be noticed by the judges.

2. Business community participation—The students will get the most out of the competition and the selection of winners will be more meaning-ful if a good cross section of the business community participates. The judging group should include entrepreneurs, corporate executives, bankers, lawyers, accountants, mar-keters, investors and other profes-sionals. Many competitions include a chance for the judges to give feed-back to the participants. A varied judging base allows for feedback from multiple view points.

3. Event structure that promotes stu-dent/judge interaction—Schools certainly benefit from the public-ity of hosting such an event, but the real benefit is for the students. They benefit greatly from the effort that goes into preparing their entry, making the presentation, addressing questions from judges and receiving the feedback. Typically the judg-ing group will include potential employers, service providers and other individuals that can become a part of a student’s network. A suc-cessful event should include oppor-tunities for students to meet and get to know the judges.

PKF Texas: What do you think are the most important attributes of a top-tier business plan competition?

Brad Burke: Clearly, the opportunity to learn what’s required to successfully launch a new business, and the abil-ity for mentoring from investors and experienced entrepreneurs. There also is the opportunity to meet and network with potential venture capitalists and other investors, as well as the quality of feedback, and the chances to win cash prize money.

Richard Scruggs: There is certainly the “soft return” of giving back to the com-munity and helping with the education of the students. A well-run event will also include many other more tangible benefits to companies, including:• Technology identification—They

may see a technology that they would like to license or invest in.

• Name recognition—Companies have a chance to extend their name recognition within the student group and the judging group. If they recruit on the campuses rep-resented in the competition, their participation helps their reputation.

• Recruiting—This is a very good way to see students in action. You can see them in formal settings such as the presentation and in informal sessions such as receptions. If you are looking for MBAs this is a great way to identify top candidates. At an event, such as A&M’s MBA Tech Transfer Challenge, a company has a way of seeing every MBA candi-date. In one day they can identify the top candidates from the MBA class and, perhaps, initiate a rela-tionship that will result in a hiring down the road.

• Networking—Company representa-tives usually have the opportunity to meet and mingle with judges from many other companies, indus-tries and areas of expertise. It is not unusual for several new connections to be made at these events.As with most activities like this, the

opportunity for benefit is there. It is up to the company to take advantage of the situation and make it happen. e

PKF Texas at a Glancecontinued from page 10

Business plan competitions

13THE LEADING EDGE

service

Business executives say they only see the positives in encouraging their employees to get involved

in the community by volunteering.“I can’t see any downside,” says Carol Brady, firm

administrator at Beach, Fleischman & Co., a Leading Edge Alliance firm. “We encourage volunteerism.

“It’s part of orientation and it’s across the board, from partners and managers to administrative staff,” she notes.

John Kunitzer, president and CEO of Yeo & Yeo, a Leading Edge Alliance firm, says promoting volun-teerism comes from the top. “It’s handed down one generation to the next,” he says, noting Yeo & Yeo has been active in the community for 82 years.

Kunitzer says creating a volunteering culture comes from not only talking about its importance but doing it. “It’s a real firm belief that it feels really good giving back to the community,” he says.

Volunteering is a built-in expectation, Kunitzer notes.

Both Kunitzer and Brady say volunteering takes on many forms—from sitting on boards of organizations to giving time and money to a particular effort.

At Main Street Gourmet, co-CEO Steve Marks combines his business’ products directly with the community service needs. He helped create the Muffins for Mammograms program with Akron (Ohio) General Hospital. Main Street bakes and donates its muffins to the hospital to sell. The pro-ceeds go to pay for mammograms for women who are not able to afford them.

“It’s actually saved lives,” Marks says.“Giving back to the community is the right thing

to do,” he says. “It makes strong business sense.”Marks understands first hand the importance of

connecting community service to good business. He is the founder of the Akron Marathon, which requires corporate sponsors and 2,500 volunteers to produce.

“When I raise money for the marathon, I ask, ‘what would the donor want?’ from a marketing standpoint, not necessarily a philanthropic one,” he says.

“We’re a good corporate citizen,” he says. Last year, Yeo & Yeo won the Saginaw County Chamber of Commerce Community Service Award.

It’s the little stories in which Kunitzer also finds rewards. When the United Way pledges came in one year, he noticed a pledge from a single, divorced mom. Knowing of her struggles, he was surprised at the gen-erous amount and made a point of recognizing her.

“We don’t do it for recognition, but it’s nice to be recognized. We’re not strong-arming employees. We’re a committed culture,” he says. e

cultivates civic-minded businesses, caring employees

Volunteerism

That approach stems from being inundated with donation requests himself at Main Street Gourmet, a client of Leading Edge Alliance firm SS&G Financial Services.

Both Brady and Kunitzer understand the challenge of so many requests for charitable contributions. Each follows a general plan in determining to whom to donate, which primarily centers around those activi-ties in which their employees are involved.

“We have a lot of people involved,” Kunitzer says. “We try to mix it up and spread it around.”

Brady says her firm supports organizations rather than individual events, and 90 percent of its approved requests come from within the firm.

“We like the fact that we can promote the wonder-ful firm reputation in the community,” she says.

Marks says his Main Street Gourmet employees frequently offer their time without ever being asked. “I didn’t consciously build it. I found the right people to hire, good people who have a good work ethic and have a good conscience,” he explains.

Kunitzer also says having the right people on board for the company overall sustains the volunteer culture as well.

“GIVING BACK TO THE COMMUNITY IS THE RIGHT THING TO DO. IT MAKES STRONG BUSINESS SENSE.”—STEVE MARKS, MAIN STREET GOURMET

14 VOLUME 5 ■ ISSUE 3 ■ 2005

operational

Don’t just JUMP into business—THINK, PLAN AND REALIZE

15THE LEADING EDGE

When Curt and Karen Waisath’s second child arrived home, they took a big leap. The family’s

sole wage earner, Curt, walked into his employer, Henry & Horne, to announce the arrival of his son and gave his two-week notice.

That was in June 1997, two or three years after the couple had begun intensive research and develop-ment to create a new type of candle.

“I don’t know what we were thinking,” Curt Waisath says with a laugh today. “We knew we had a great prod-uct and together we were committed. We were willing to take the risk and to start over if necessary.”

Today, Gold Canyon Candle Co. is a thriving busi-ness, employing more than 275 people in its peak season. The first candle was sold on Oct. 1, 1997, and the first employee hired on Nov. 1, 1997.

Waisath says he always wanted to own a business. His wife, Karen, comes from a family of entrepre-neurs. They had been looking for the right opportu-nities for while. The candle idea came about because Karen bought candles that smelled good in the store only to disappoint her when she lit them at home. The two created a candle product that delights the nose both at the store and in the home.

“We’ve never tried anything as hard as this. It’s a mindset, a leap of faith and quitting my job prior to having a product made us do it,” Waisath says. “There’s the entrepreneurial moment when you say, ‘Yes, we can.’ The rest was pure staying alive.”

Todd Lifson, a partner at Leading Edge Alliance firm Lurie Besikof Lapidus & Company, has started three businesses himself. He says people interested in owning a business typically start one of three ways. They start a business, like Waisath did, buy an existing business or purchase a franchise.

He says business ownership first requires a self-assessment. Know who you are and what you do best, Lifson says. “Are you someone who wants to start from scratch? Or do you want a shortcut and have the money to buy a business,” he asks.

Perhaps you are somewhere in the middle and want the comfort of an established operation but the challenge of opening a new franchise.

With a self-assessment complete, the next step is proper planning. Lifson says this includes deter-mining financing, structure as well as systems for accounting, technology and human resources.

“There are a lot of pieces to it,” says Alan Osmolowski, a partner with Carlin, Charron & Rosen, a Leading

Edge Alliance firm.Entity choices include establishing a corporation, a

partnership, a limited liability corporation or sole pro-prietorship. “There are pluses and minuses with each, as well as tax liability considerations,” he says.

Osmolowski says LLCs are emerging as the entity of choice most recently because they offer flexibility.

But most important in the establishment of any business is a business plan. “I can’t stress that enough—the importance of sitting down and developing a business plan,” Osmolowski says. “Entrepreneurs tend to jump in first and ask questions later.”

Suzanne Lozano, a CPA with Leading Edge Alliance firm Yeo & Yeo, says business plans allow the creators to see if their idea is feasible. “Some of them are not,” she notes.

Yeo & Yeo has developed a “Starting a Business Checklist” for its clients to use.

One critical step, experts agree, is put-ting together the right advisory team when starting the business.

Your CPA, attorney and possibly other investors all can be good choices for the advisory board as the business is developed, Osmolowski says.

“Get a banking relationship right from the begin-ning,” he adds, noting securing loans often requires collateral and sound business plans.

One of Lozano’s specialties is working with doc-tors setting up medical practices in Michigan. In fact, Yeo & Yeo works with the Michigan State Medical Society on a program for new doctors.

“There are so many details that physicians and their office managers don’t think about, such as payroll and insurance,” she says. “There are many steps in establishing a medical practice, especially regarding insurance claim filing. If you don’t follow the process correctly in the beginning, reimburse-ment is delayed.”

A solid business plan can act as road map, Lozano says.

Even if after the business starts the plan is not as useful as hoped, the process of creating one was use-ful, Osmolowski says. “You readjust your strategy as necessary.”

As a CPA, Curt Waisath had the financial back-ground and understanding that many new business owners do not. “That’s a key,” he says.

Another essential component to Gold Canyon

Candle’s success, Waisath says, is hiring good peo-ple—hard workers who love what they do and take ownership of their responsibilities.

“The critical things to jump our success were hir-ing the right people at the right time,” he says.

Waisath says starting a business from scratch is not for the weak stomachs. He recalls all the nerves and emotions that caused him to be sick each morn-ing that first year in business.

“You’re thinking, ‘we have to make payroll, rent,’” he explains.

“The enthusiasm, excitement and pressure never stop,” Waisath says, though his queasy stomach has settled down.

Instead of worrying about how to meet payroll, the concerns and questions on Waisath’s mind now center on how to grow the business bigger and how to do things better, more efficiently, he says.

Lifson says entrepreneurs often do not take time to reflect on their successes the longer they are in business. “It’s very exciting and fun to be able to make your own decisions, to live and die by those decisions,” he says.

“Look back, though, at what you started, what you built, your personal satisfaction and how you’re adding to society,” Lifson says. “You‘re a catalyst to what’s happening in the world.” e

Todd Lifson, a partner with Lurie Besikof Lapidus & Company, says similar themes appear in falter-ing business starts. Entrepreneurs often:

• Underestimate the effort and capital required to start a business.

• Assume that they have a product or service that others want.

• Look ahead to the next deal rather than completing the necessary tasks at hand.

THREE steps to success

Alan Osmolowski of Carlin, Charron and Rosen says the three keys to remember when starting a business include:

• Create the right team of advisors.• Have a business plan.• Address working capital needs up front.

COMMON MISTAKES in starting a business

16 VOLUME 5 ■ ISSUE 3 ■ 2005

strategic

12 practical tax planning techniquesBy Anjana Jackson, CPA and Edward N. Goldsberry, CPA

With reports of so-called abusive tax shelters constantly in the news, many taxpayers and practitioners are

increasingly wary of even the most fundamental of tax plan-ning alternatives. However, solid tax planning is an essential component to build personal wealth and business profits, and not all tax planning is about outrageous or questionable tax shelters. Based on your business and personal activities, planning can save you money.

The following legitimate, intentional and potentially tax-reducing strategies are intended as a sampler—not an all-inclusive list of tax-planning ideas. Consider them for your business.

1. Take advantage of the newly enacted deduction for income attributable to domestic production activities.

The final version in 2010 will eventually permit tax deduc-tions for up to 9 percent of taxable income derived from qualified domestic production activities, beginning with 3 percent in 2005. These include manufacturing, production, growth or extraction activities. Deductions also will also be limited by domestic wages paid.

2.Consider the EIE if you manufacture and export U.S. products.

The Extraterritorial Income Exclusion may be for you. Extraterritorial income is partially excludable from taxable gross income, and comprises “foreign trading gross receipts” arising from sales of certain qualifying foreign trade property outside the United States. This includes the sale or rental of qualifying foreign trade property out-side the United States; the performance of certain services related to the sale or rental; and certain other limited ser-vices. Although this tax benefit was repealed in 2004, it is still available over the next three years as it is phased out. Eligible taxpayers can still amend returns to claim refunds by taking the exclusion for prior open tax years.

3. If the EIE helped, consider a Domestic International Sales Corporation.

A DISC is another tool available to many export-ers, enabling taxpayers to reduce their taxable income from export sales and activities. Even though the tax deferral ben-efits of the DISC may be subject to an annual interest cost payable to the IRS, the benefits should be of more interest now that other options are on the way out of the tax law.

17THE LEADING EDGE

4. Look for research & development tax credits.

You may be eligible for R&D tax credits—more broadly available than many taxpayers realize. Frequently businesses assume their activities do not constitute R&D, and/or overlook costs that can be included in qualifying expenditures. You do not have to be in a high-tech busi-ness to have qualifying R&D expenditures and do not have to hire high-tech outside expertise.

5. Use the cash method of accounting.

To encourage the development and growth of U.S. small businesses, in part by simplify-

ing tax compliance costs, the IRS recently increased the size of companies that can operate on cash basis accounting. Cash accounting can simplify reporting, and save taxes because you typically do not recognize revenue until the amount is collected. Expenses are typically deductible when paid, and qualifying busi-nesses are usually those with less than $10 million in annual gross receipts that do not earn a majority of their income in certain businesses, including mining, manufacturing, wholesale or retail trade, or certain information activities.

6. Defer taxes with like-kind exchanges.

Collecting taxes when cash is available to pay is considered good tax policy; therefore,

tax rules permit like-kind exchanges. These occur when a taxpayer exchanges property for similar new or used property. Like-kind exchanges are particular-ly popular with real estate properties. In a qualifying like-kind exchange, tax on the gain can be deferred through adjustments to the taxpayer’s basis (carrying cost) of the newly acquired property. Taxpayers typi-cally will pay tax on gain only to the extent that cash or cash equivalents are received in the swap.

7. Increase depreciation deductions using cost segregation.Tax rules governing depreciation of real estate

do not require that all real estate components and attachments be depreciated over the lengthy lives required for real property. Cost segregation identifies asset costs that are often buried in building costs, reclassifying them to a category with a shorter depre-ciable life in order to maximize the depreciation deduction in the early years. Most real property can yield extra near-term depreciation deductions based on the results of a cost segregation study. Cost seg-regation studies for properties placed in service after Sept. 11, 2001, and before Dec. 31, 2004, may yield extra depreciation benefits due to post-Sept. 11 tax depreciation economic stimulus incentives.

8. Make sure your income is not taxed twice.

Unlike most nations, the United States taxes income at the corporate level and again to indi-viduals when dividends are paid. Recent tax changes reduced, but did not eliminate, this extra cost, and as a result, many U.S. small businesses are structured as tax-transparencies such as partnerships and S corpo-rations so that the income is taxed only once to the owners of the business.

9. In solid tax planning, timing is almost everything—the earlier the better.

Most of the solid tax strategies discussed here are based on simply and legally deferring income and/or accelerating deductions. Many other opportunities also exist.

For example, have you maximized your personal retirement plan contributions and benefits? Taxes can be deferred for years, or even eliminated entirely, on income contributed to or earned within qualified retirement plans or IRAs. Dollars contributed to a

plan today are far more valuable than dollars contrib-uted 10 years from now.

As another example, do you have current estate and/or business succession plan? There are substan-tial non-tax reasons to plan your estate and business succession, but equally valid tax reasons. And, the earlier these are done, the more easily and effectively they can be executed.

10. It’s not over till it’s over. In many cases, taxpayers can claim some of the benefits through amended

returns. For example, taxpayers may, in certain circumstances, amend returns to claim additional depreciation deductions from cost segregation; addi-tional research and development tax credits that were not claimed on the original return; or addi-tional extraterritorial income exclusion benefits that may have been ignored or simply overlooked.

11. Good constructive ideas do not have to always be of the home run variety.In fact, the combination of two or

three of these ideas may yield as much benefit over time as the more publicized tax shelters, and at much lower risk.

12. Remember that execution is key. A poorly executed acceptable tax strat-egy is no better than a well-executed

abusive one. In either case, the IRS has the upper hand.

Use tax planning to your advantageProperly used, tax planning enhances personal wealth and business profits. Like any other tool, it is most effective when used safely. These sample strategies, if properly executed, will avoid publicized abusive tax shelter risks because they reflect accepted, intended benefits under our tax law. e

FREQUENTLY BUSINESSES ASSUME THEIR ACTIVITIES DO NOT CONSTITUTE R&D, AND/OR OVERLOOK COSTS THAT CAN BE INCLUDED IN QUALIFYING EXPENDITURES.

18 VOLUME 5 ■ ISSUE 3 ■ 2005

Professional Sales Associates serves its cus-tomers and employees well. To its manu-

facturer clients, PSA offers a collaborative, streamlined alternative to expensive in-house sales teams. To its employees, PSA allows them the opportunity to take ownership in the company.

The dental industry is a specialized market in health care—capital equipment for dental offices, which consists of everything from utility room equipment and operatory equip-ment to high-tech imaging equipment. PSA serves as sales representatives for five non-

competing manufacturers. Its clients are full-service dental distributors.

Begun in 1969, PSA started with four people. Today, the company has 30 people who cover all 50 states, while living in 20 states. PSA President Ed Zehfuss and two staff members oper-ate from its Colorado headquarters.

PSA currently is the largest indepen-dent representative organization in the industry, Zehfuss notes. As such, it’s good reputation is well known.

PSA employees stay with the company a long time. Zehfuss

has been there since 1972. A vacancy typically opens up only when someone retires, he says. “We’re in a very fortunate position, many of our applicants are from within our industry.

“Part of the attraction is that after a year of working at PSA, you can buy into the company,” he explains. “All salespeople are stockholders in the company. It’s unique.

“When everybody takes ownership, there’s very little turnover.”

With the sales force also being the owners, a different atmosphere is created than a typi-cal corporation. “We answer to our manufac-turers as well as ourselves. There’s flexibility,” Zehfuss says. “It’s like a fraternity. We’re all friends.”

The overarching goal for all PSA sales-people is to do well for every manufacturer that the company represents. “We take care of all the manufacturers across the board,” he says. “We have great relationships with our manufacturers, some of whom have been with us since 1969.”

If the manufacturers had to set up their own sales teams, it would be expensive, par-ticularly in the small dental industry. Zehfuss says the end-of-the-line potential customers total about 120,000 dentists in the United States.

Unlike most of the health care industry, dentists are not becoming “corporatized” or joining large conglomerates to continue prac-ticing. Almost all dentists operate privately, according to the American Dental Association. About 80 percent are sole proprietors and 13 percent work in a partnership, according to ADA research.

“Dentists are the last vestige of the fam-ily practice health care businesses,” Zehfuss says.

PSA offers an independent, cost-effective way for manufacturers to sell their products. The only time the manufacturer pays is when PSA sells a product.

“We work on 100-percent commission,” he says.

But even an independent sales team, 30 people living and working in 20 states while representing the entire country, can present its own challenges. However, technology has helped out a lot in the last decade or two.

“Over the years, the ability to communicate has become less of a challenge,” Zehfuss says.

When he entered the business in 1967 and would be on the road during the day, he says he often ended up in the same Holiday Inn

lobby to call his customers or manufacturers. “You had to get off the road to make a call,” he says.

If he was on a long business trip, his wife would become a message taker (answering machines weren’t an option) and he may have checked in with her a couple times. Sometimes, clients would mail a letter, simply saying, “Call me.”

“Then, if you got back within three days, they thought you were a hero. Today, if you do not respond right away they ask where have you been,” Zehfuss says.

He estimates that he writes only about 10 percent of the letters he did when e-mail and cell phones weren’t available.

In addition, the constant communication avenues mean that PSA is better able to serve the customer. If there’s a problem with the product as it’s installed in an office, instant con-tact is available to help resolve whatever issues exist. “It’s on-the-spot service,” Zehfuss says.

Technology also has changed the products that PSA sells. For example, film for X-rays have to be processed chemically in a more time-consuming, more costly manner. Today, digital scanners are being used as images can be received quickly and scanned for reviewing.

When everything is considered, Zehfuss says the most important thing to remember is that PSA is in the relationship business.

“It’s good manufacturers, good products,” he says, in combination with a sales force dedicated to the mission.

He says that dedication that began more than 30 years ago remains. The PSA group worked hard together to achieve today’s success.

“We struggled 10 to 12 years to build the business, it didn’t happen overnight,” Zehfuss says. e

PSA has been a client of the Leading Edge Alliance firm, Carlin, Charron & Rosen LLP for 36 years. The firm provides PSA with business consulting, financial statement review and tax services.

client PROFESSIONAL SALES

ASSOCIATES INC.

PSA partners present attractive,

alternative sales approach in specialized industry

The Leading Edge offers:

• Access to the best and brightest teams of business advisers—a peer-to-peer connection that provides the right solutions for clients.

• Innovative, practice-proven strategies for improving performance in management, business processes, finance, operations, information technology and marketing.

• A leading knowledge resource for multi-disciplinary information and industry-specific expertise responsive to clients’ unique needs.

• The strength to attract the highest quality team members.

• The ability to service clients worldwide. The alliance offers accounting and consulting services through a global network of firms, with 245 offices in more than 68 countries.

• The Leading Edge Alliance offers world-class business advisory expertise and experience with innovation, progressiveness and quality.

To find out more about The Leading Edge Alliance, visit www.LeadingEdgeAlliance.com or contact Karen Kehl-Rose, President, at (630) 513-9814 or kkr@The-LEA.com.

The Leading Edge Alliance is an alliance of major independently owned accounting and consulting firms that share an entrepreneurial spirit and a drive to be the premier provider of professional services in their chosen markets. Leading Edge members are CPA firms that are preserving the core quality and integrity of the public accounting profession while stimulating growth and progress through innovative practices.

★Alpern RosenthalPittsburgh, PA

Argy, Wiltse & Robinson, P.C.Washington, D.C.

Baden, Gage & Schroeder, LLCFort Wayne/Indianapolis, IN

Beach Fleischman & Co. Tucson, AZ

Brady Ware Dayton, OHRichmond, IN

Brown, Edwards & Co., LLPBluefield, WV / Roanoke, VA

Brown Schultz Sheridan & Fritz Harrisburg/Lancaster, PA

Carlin, Charron & Rosen LLP Mass., Conn., RI

Clark Nuber P.S.Seattle, WA

Ehrhardt Keefe Steiner & Hottman Denver, CO

Elliott Davis, LLC Greenville/Columbia, SC

FGMK, LLCChicago, IL

Freed Maxick & Battaglia, PCBuffalo/Rochester, NY

Fuller Landau LLPToronto, Ontario and Montreal, Quebec

Gifford, Hillgass & IngwersenAtlanta, GA

Haskell & White, LLP Irvine, CA

Henry & Horne, P.L.C.Tempe/Scottsdale/Casa Grande/Pinetop, AZ

Hongo Accounting, Inc. Tokyo, Japan

KAWG&FBaltimore, MD

Kafoury, Armstrong & Co.Reno/Las Vegas, NV

Kahn, Litwin, Renza & Co.Providence, RI

Karns, Murakami & Hanashiro, LLP Honolulu, HI

Keiter Stephens Hurst Gary & ShreavesGlen Allen, VA

Kostin Ruffkess & Co., LLCHartford, CT

Kreischer Miller Philadelphia, PA

Lane Gorman Trubitt, LLP Dallas, TX

Lattimore Black Morgan & Cain, P.C.Nashville/Knoxville, TN

Lurie Besikof Lapidus & Co., LLPMinneapolis, MN

Marcum & Kliegman, LLPNew York, NYGeorge Town, Grand Cayman

Morrison, Brown, Argiz & Farra, LLPFort Lauderdale/Miami, FL

O’Sullivan Creel, LLPFort Walton Beach/Pensacola, FL

Pannell Kerr Forster of Texas, P.C. Houston, TX

Postlethwaite & Netterville, APAC Baton Rouge/New Orleans, LA

SS&G Financial ServicesAkron/Cleveland/Cincinnati/Columbus, OH

Stonefield, Josephson, Inc.San Francisco/Los Angeles, CA

Suby Von Haden & Associates Madison/Milwaukee, WI

Warren, Averett, Kimbrough & Marino, LLC Birmingham, AL

Wilson, Price, Barranco, Blankenship & Billingsley Montgomery, AL

Wiss & Co., LLP Livingston/Red Bank, NJ

Yeo & Yeo, P.C.Saginaw/Alma/Ann Arbor/Flint/Kalamazoo/Lansing/Marlette/Midland, MI

LEA EUROPEBol Accountants Boxmeer/Schijndel/Venray, The Netherlands

BPG Beratungs - und Prüfungsgesellschaft mbHBerlin/Frankfurt/Düsseldorf, Germany

Groupe Ex et ComParis, France

H. W. Fisher & Co. London, England

Johnston Carmichael Edinburgh/Glasgow/Aberdeen/Inverness, Scotland

Russell Brennan Keane Chartered AccountantsDublin/ Athlone, Ireland

Studio Caramanti E TicozziMilan, Italy

19THE LEADING EDGE

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