Posted on Dec 7, 2017

R&D Credit Qualification

According to our project partner, CTI, some specific examples of qualifying research activities that architecture and engineering firms have conducted in the course of business include, but are not limited to, the following:

  • Experimentation with natural ventilation
  • Energy analysis of exterior wall systems and building envelope
  • Occupant thermal comfort conditions
  • Exterior environmental effects
  • Design criteria for spatial configuration
  • Analysis of transient heat transfer for exterior building envelope
  • Energy analysis of multiple skin wall
  • Renewable energy systems performance analysis optimization
  • Performance/cost analysis of PV system
  • Solar energy design and daylighting analysis for temp regulation
  • Heat transfer and dew point analysis of exterior wall
  • Analysis for heat transfer coefficient various materials of walls
  • Performance and cost analysis of photovoltaic system
  • Life cycle cost analysis of building integrated photovoltaics
  • Solar hot water system design and testing

There are also activities that do not qualify for the credit, and it’s important to know some of these examples up front before considering an R&D study:

  • General capital expenditures
  • Training
  • Selling existing products
  • Travel expenses and administrative expenses
  • Routine data collection; routine quality control
  • Marketing or market research
  • Activity related to management function
  • Reverse engineering
  • Funded research (Grants and Contracts)
  • Research outside of U.S.

Excluded Activities 41(d) (4)(c)

  • Research after commercial production
  • Adaptation of an existing business component
  • Duplication of an existing business component
  • Efficiency surveys
  • Research in social sciences

As you can see, the Qualifying Research Expenses (QREs) must be related to new or untried experimentation in design. The research itself must not be funded, but done in the course of normal business activities. The firm assumes all rights and risks for the research.

The final test is defense and representation of an R&D tax credit claim with the IRS. Substantial claims are likely to receive an IRS query or audit. Strong data review, accurate calculation and documentation guidance by an experienced R&D study expert are critical steps to support your firm’s ability to claim this valuable federal credit.

Talk to the tax team at Cornwell Jackson about your potential R&D qualifying activities. We can review your data to discover qualifying research expenses and help you decide if an R&D study would be financially valuable for your firm.

Download the Whitepaper: Take Another Look at R&D Credit Qualification

Gary Jackson, CPA, is a tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing tax planning to individuals and business leaders across North Texas. Contact him at gary.jackson@cornwelljackson.com.

Posted on Nov 27, 2017

R&D Credit Qualification

R&D Study

If it is determined in the course of our tax consulting that your firm could qualify for a substantial R&D tax credit, we may suggest a third-party expert to conduct a more extensive R&D study. Our team has experience with initial discovery and phase two project review and qualification for low to medium R&D activities, but we align with experienced tax credit project partners when considering complex or high R&D activities.

For architecture and engineering firms, most use some type of project accounting data that can help R&D experts analyze Qualifying Research Expenses (QREs). The most significant qualifiers or data fields to review include:

  • Contract type
  • Line of business or discipline
  • Project type
  • Phases, sub-phases or tasks
  • Employee hours, titles and departments
  • Subcontractors
  • Project location

This data should be reviewed prior to interviews with leaders or project managers. It will help the R&D expert determine the right questions to ask about each project. You may allow the expert to export the data or provide the expert with templates that include this information and other data requested.

The second phase of an R&D study is the Communications or Project Review Phase. The R&D expert will walk through the four-part test and discuss product development lifecycle to help the project team identify and qualify R&D activities. This phase may take some time to educate firms that are new to R&D QRE qualification, but mentioning the potential tax savings can support participation. Any qualifying activities will be identified by project and phases of development.

The third phase of an R&D study is the calculation of QREs. The R&D expert will review the ratio of each employee’s qualified research hours to total hours worked. Those possible taxable wages will help the expert determine wage expenditures linked to R&D. The same calculations will be made regarding supply costs, subcontractors and contract or agreement expenses.

The final phase of the R&D study is documentation. The QREs calculation will need to be documented to note the QREs by phases/tasks performed on qualifying projects. This level of detail will support a credit claim to the IRS for the current or previous tax years.

Documentation is Critical for R&D Study

According to Barry Devine, an R&D study expert at Corporate Tax Incentives, with offices in California, Denver, Atlanta and Houston, documentation is critical to achieving a successful IRS R&D credit claim. Documentation needs to happen during the normal course of business as a sort of data map to prove R&D activities. The documentation process should not overly burden the firm — once it’s set up, of course.

By following the firm’s standard project set-up guide, you should be able to locate documents consistently under the following categories or standard practices:

  • Document name
  • Location of document
  • Frequency document is generated
  • Document owner or author
  • Instructions to find and access the document
  • Testing results
  • Project timelines
  • Meeting minutes

Your firm may have the documentation in your system, but a consistent process for project documentation will make it easier to claim R&D credits now and in the future.

Talk to the tax team at Cornwell Jackson about your potential R&D qualifying activities. We can review your data to discover qualifying research expenses and help you decide if an R&D study would be financially valuable for your firm.

Continue Reading: Common Qualifying Activities and Case Examples of R&D Credit Qualifications

Gary Jackson, CPA, is a tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing tax planning to individuals and business leaders across North Texas. Contact him at gary.jackson@cornwelljackson.com.

Posted on Nov 14, 2017

R&D Credit Qualification

It may not be as easy for architecture and engineering firms to qualify for R&D credits, but that doesn’t mean it’s impossible. Now that tax reform may result in lower corporate tax rates, it’s a good time to investigate any R&D activities that occurred for the 2015, 2016 or 2017 tax years. Resulting credits could offset higher federal tax in previous years as well as state franchise or business tax collected in Texas. The first step is an R&D study.

R&D Credit Qualification

Sustainability has been a trend in architecture and engineering for many years. As professional service firms develop new processes and methodologies for making buildings stronger, more environmentally friendly or flexible for users, they may not be thinking about how this innovation could reduce their tax impact.

Once the primary realm of manufacturing or product developers, we know that research and development is happening in service-based industries, too. Due to some changes to federal tax law, options have expanded for more firms to access R&D tax credits. In addition, the digital solutions that companies use to track project costs and processes may make it easier than in the past to collect data and determine eligibility.

A recent case study of one engineering firm that underwent an R&D study found enough quantitative data on R&D costs to support refunding most of the firm’s federal tax liability for the three prior tax years. There was also enough carry-forward remaining to provide the estimated equivalent of an additional four years’ worth of credit. When the firm was audited, according to R&D study expert SourceHOV|Tax, the IRS audit was clean.

The data to support the credit came from the engineering firm’s experience with large government and corporate clients that would request sustainable structures and require new designs to accomplish it. The firm’s historical preservation projects also require new processes and methodologies to strengthen buildings and support longevity without compromising historical integrity.

If you have even the slightest sense that an R&D study could benefit your engineering, design or architectural firm, know that there are different levels of studies that can accomplish your goal. Most importantly, current discussions around tax reform make this 2017 tax year the best time to look into it.

Here’s why:

Tax Reform Encourages Closer Look at R&D Credits

Two years ago, federal legislation made the R&D Tax Credit a permanent business credit, which meant that business owners could now plan ahead for future tax years rather than guessing whether or not it would be available and for which types of businesses.  The credit was expanded to offset the Alternative Minimum Tax for private, Eligible Small Businesses (ESBs) with  gross receipts of less than $50 million. There is also a payroll tax offset up to $250,000 available to Qualified Small Businesses (QSBs) with less than $5 million in gross receipts that were started up to five years ago.

If they qualify, businesses can receive a credit for qualifying R&D expenses that may include the following:

  • Salaries and wages – mainly W2 (Box 1)
  • Supply costs – used or consumed during research and experimentation
  • Contractor costs – up to 65 percent of qualifying costs, including paying for rights and risks of R&D, which means assuming the risks of experimentation without any funding for it and having substantial rights to the research results

In order to quality for the credit, businesses must pass a four-part test related to their research and development activities in a given tax year.

Permitted Purpose – Is the activity intended to improve a business component’s functionality, performance, reliability or quality?

Technological in Nature – The activity performed must not rely on social sciences, but on the principles of physical, biological and computer sciences or engineering

Elimination of Uncertainty – The activity is intended to discover information to eliminate technical uncertainty regarding the capability or method for developing or improving a product or process, or the appropriateness of the business components’ design

Process of Experimentation – With the result being uncertain, the activities involved in trying to achieve the result must be experimental in nature, and include actual experiments and evaluation of one or more alternatives

A few of the qualifying research expenses (QREs) for architectural and engineering firms could happen during the Pre-Design and Bidding process when professionals may experiment with initial design and concepting. But the most significant QREs occur during the Schematic Design and Design Development phases. Professionals may need to evaluate, analyze and test concepts more heavily and also produce mock-ups of innovative or untried processes and methodologies for the client.

Your firm may have already conducted qualifying R&D in previous years and not realized that expenses related to that R&D could make your firm eligible for a tax credit. Fear not. R&D Tax Credit studies can look back three tax years to identify qualifying research expenses. The reason this may be significant for your business now is that tax reform may reduce corporate tax rates going forward. The potential for high tax savings through an R&D tax study won’t get any better than now if corporate tax rates drop for 2018.

The current R&D credit allows firms to offset federal taxation as well as state franchise or business taxes in Texas for tax years 2015, 2016 and 2017. For qualifying businesses, the resulting tax credits often outweigh the costs of an R&D study when you factor in the potential federal and state tax savings.

If your firm provides any of the following services, it is worth considering an R&D Credit Qualification tax study:

  • Architecture
  • Geotechnical services
  • Civil engineering
  • Structural engineering
  • Mechanical engineering
  • Electrical Engineering
  • Surveying

There are exceptions to R&D conducted in these disciplines, the main one having to do with funded research. If your firm is under contract and paid to conduct research or if you have received a grant to conduct the research, it may be hard to prove that your expenses qualify for a tax credit. A tax expert experienced with R&D tax credit feasibility like Cornwell Jackson can usually determine this factor early in the discovery process.

Talk to the tax team at Cornwell Jackson about your potential R&D qualifying activities. We can review your data to discover qualifying research expenses and help you decide if an R&D study would be financially valuable for your firm.

Continue Reading: What is an R&D Study?

Gary Jackson, CPA, is a tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing tax planning to individuals and business leaders across North Texas. Contact him at gary.jackson@cornwelljackson.com.

Posted on Feb 7, 2017

Outsourcing Combines with Automation

Most outsourced services employ some type of online or automated product to perform the work and make data easily accessible. In 2016, the top billing and invoicing software for business included FreshBooks, QuickBooks and Zoho Invoice. These solutions were chosen for their ease of use, expense tracking, automated invoicing, online payment options, customized reports and customer support. Zoho is also integrated with a larger suite of business software, including CRM and accounting software.

There are programs designed specifically for an industry such as Clio, a time and billing software for law firms that is cloud-based and purchased by subscription. However, decisions about automation and outsourcing shouldn’t be made according to the features of a software package alone. They should be made    foremost from the perspective of being efficient. If you won’t have time to train staff properly on a new software solution, the move toward outsourcing may be more cost-effective in the long run.

We addressed this in an earlier article, but it bears repeating. Key considerations for outsourcing accounting and payroll are as follows:

  • How much experience does the outsourcing provider have in payroll administration or accounting — and is there a dedicated team?
  • Will the team walk you through data collection and set-up or are you on your own?
  • Who is your go-to contact to ask questions about liabilities or deadlines?
  • Is the provider NACHA compliant for ACH direct deposits?
  • Can you arrange for tax payments on a schedule that supports cash flow along with compliance?

accounting firms dallas, be more billable, outsource payroll administration, professional service accountingThis last question is an important business consideration that most companies don’t know about. Some payroll services withdraw all funds from the business account for payroll transfers and taxes all at once, even if taxes aren’t due for a few weeks. If your receivables come in the first week of the month and payroll taxes are due on the 15th of the month, you can schedule payments in a way that supports cash flow while still being compliant. Some payroll services may not provide guidance on industry-specific issues like law firm shareholder bonuses, for example. Consider carefully the level of industry expertise before selecting a provider.

Automating Finance is a Long-term Strategy

Determining the right automation solutions for your firm can’t be done overnight. It seems that new providers and products are coming to the market all the time, and it’s hard to compare apples to apples beyond price.

Successful transitions to outsourced and automated processes and solutions have three things in common:

There must be a clear business case for the automation.

Before selecting a solution, firms should review their current accounting and payroll processes to cut out any redundant or outdated steps. It doesn’t make sense to automate a process if it’s outdated. A CPA can help you review accounting processes and procedures to identify best practices before seeking automation.

Integration with existing systems makes adoption easier.

You may already have some solutions in place that are working well. Future automation should integrate with those solutions for efficient management and reporting. For example, you may already use a time and billing or workflow system you really like. New accounting or payroll tools should play well with those solutions. Your goal is an end-to-end process that reduces manual work and errors while improving the sophisticated of data.

IT staff should meet with operations and finance staff to understand the goals.

Whether you have internal or outsourced IT staff, one of the biggest mistakes with technology adoption is that IT doesn’t speak enough to operations to make sure the solution is actually going to solve problems and enhance the business. In the same way, IT needs to be in the business loop to determine if a chosen solution can be easily supported and maintained. In the industry, this collaboration is called “DevOps,” and it’s not yet foolproof. Some experts predict that movement toward cloud-based technologies will make developers happier because they can update solutions without having to check in with Ops. Meanwhile, the operations staff can get what they need without worrying about costs or slow adoption by staff.

If we just look at automating the invoicing process, firms could improve efficiency dramatically. About 84 percent of invoices enter processing in formats that include paper, fax and email attachments, according to a study by Paystream Advisors. We’ve seen estimates that the average cost of automated invoice processing is $4 versus $20 for manual processing.

Automated payroll processing reduces costs even further. The American Payroll Association (APA) estimates that automation reduces payroll processing costs by as much as 80 percent, much of that from reducing errors in invoices and paychecks…which also reduces the risk of payroll penalties.

Cornwell Jackson’s Business Services Department offers a wide range of outsourced financial services to serve professional services — including outsourced payroll processing and solutions to improve cash flow and productivity.  Contact us for a consultation.

Download the Whitepaper: Be More Billable: How to Add More Automation to Professional Service Accounting

Mike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s assurance practice and works directly with many professional services firms in the metroplex. Contact him at mike.rizkal@cornwelljackson.com or 972-202-8031.

Posted on Jan 24, 2017

Professional service firms offer their services in a variety of ways, and this fact adds complexity to time and billing processes. If time and billing are complex, then accounting and payroll also have many moving parts. By automating some of the steps that go into accurate time and billing — and closing the gap between time and billing and accounts receivables — professional service firms improve cash flow and profits. Outsourcing is one solution to achieve automation without the costs of purchasing technology and training in-house staff.

Firms that use an in-house team for payroll, time and attendance and benefits administration spend 20 percent more than organizations that outsource those functions, according to UK-based global market research company, Technavio. The analysis, from 2016 through 2020, found that payroll outsourcing is the fastest growing segment in the human resource outsourcing market. It projects a compound annual growth rate of 4.4 percent. Just tally up the salary and benefits of a full-time equivalent employee to do the job correctly as well as the cost of system upgrades, training, supplies and office space. Then look at the rate a vetted payroll or accounting service will charge to do the function for you.

This growth rate also makes sense due to the sensitive information in payroll as well as the increasing complexity of compliance for withholdings, benefits elections and tax reporting. Payroll outsource services specialize in this area, bringing efficiencies through automation and increasing employee access to pay stubs and tax information.

Segregating payroll and accounting from internal staff serves two purposes: efficiency and oversight.

An effective outsourced provider reduces non-billable time for professionals and also delivers timely reports and financials to make proactive decisions. In addition, the outsourced provider can take a more holistic view of the organization and implement processes and systems that support compliance and organization.

Even in an accounting firm where the professionals are more than capable of doing their own bookkeeping and payroll, keeping these functions in-house can lead to a lack of internal controls and objectivity — not to mention confidentiality.

 A report by KPMG and HfS Research predicted that accounting and business process outsourcing overall would grow at an annual compound rate of 8 percent through 2017.

When firms select the right fit for outsourced payroll or accounting services, the service becomes an extension of the enterprise rather than a substitute. CPA firms that offer outsourced accounting or payroll services can help clients beyond their back-office in areas such as strategic planning, forecasting and compliance.

With a central clearinghouse to view financials and billing information, firms will have up-to-date data to proactively support business decisions rather than relying on historic data from several months ago.

In fact, integrative technology has advanced to allow time and billing systems to “communicate” with accounting software. Accounts can age out of the time and billing system rather than the accounting system to keep books cleaner and make forecasting easier throughout the year.

Continue Reading: Automating Finance is a Long-term Strategy

 

Cornwell Jackson’s Business Services Department offers a wide range of outsourced financial services to serve professional services — including outsourced payroll processing and solutions to improve cash flow and productivity.  Contact us for a consultation.

Mike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s assurance practice and works directly with many professional services firms in the metroplex. Contact him at mike.rizkal@cornwelljackson.com or 972-202-8031.

Posted on Jan 10, 2017

One of the primary challenges — and in some ways advantages — of professional services is that the person billing the work is frequently the person doing the work. Professionals know what it takes to complete a project or manage an ongoing retainer, and it should be reflected in the final invoice with a percentage of profit figured in.

Ideally, that’s how time and billing should work, but each professional service firm — and client — is different. Quotes can vary. Payment arrangements can vary. Timelines can vary. Clients of successful firms also tend to engage more than one service, which makes time tracking and invoicing an adventure in cross-departmental emails.

At the end of the day, the goal of every professional is to bill a larger percentage of client work than the time they spent on non-client work. Their compensation and profits depend on that billable percentage. The only way to increase time for billable work is to do less nonbillable work. To solve this challenge, more firms are adopting automated processes and outsourcing services.

There are many areas in a business to automate and outsource today, but for the purposes of this article we’ll cover time and billing, accounting and payroll functions. Inefficiency in these areas has the biggest impact on productivity, cash flow and profits. We will cover tips for outsourcing and how automation can enhance that relationship.

What Keeps You From Putting Your Business First?

First, let’s talk about the reasons professional services firms experience inefficiency. Because professionals sell their time, which is tied to their expertise, they must be expert time managers. Time management skills, however, are not always immediate. They must be learned and practiced.

Using Dwight D. Eisenhower’s Principle of Time Management, imagine placing all of your tasks into the four quadrants of Important/Urgent; Important/Not Urgent; Not Important/Urgent and Not Important/Not Urgent. Once you organize your tasks, you will quickly see that many things in your day fall into the Not Important/Urgent and Not Important/Not Urgent categories. Those items should be delegated, outsourced or eliminated.

accounting firms dallas, outsource payroll administration, professional service accounting, be more billable

 

Most of your time and energy should be spent in the Important/Not Urgent quadrant of activities because these activities result in productive and profitable results. Some examples of Important/Not Urgent activities include:

  • Client consulting
  • Business development and strategy
  • Networking
  • Delivery of high-level client work
  • Process and systems improvements
  • Planning and forecasting
  • Relationship building

The items that keep professionals from these important activities are in the other quadrants. A lack of capacity or unrealistic deadlines may place their activities too often in the Important/Urgent quadrant, leading to stress and burnout. It may also be that they treat every activity as important and urgent when it really belongs in the other quadrants.

Not Important/Not Urgent tasks are wasteful distractions like web surfing and idle conversation that aren’t tied to relationship building or clients. Eliminate these activities from your work day. It would be better to take a walk or run errands as a mental break when necessary.

Not Important/Urgent tasks are those that can often be outsourced or automated  (or delegated to staff with less experience). This is the quadrant that, when managed, can truly ramp up productivity in a professional service firm.

Here are some Not Important/Urgent activities (for experienced professionals) that adapt well to delegation.

  • Preliminary or follow-up meetings
  • Emails that require someone else’s information
  • Mail sorting
  • Reports/Summaries
  • Research
  • Vendor calls
  • Reading industry journals
  • Scheduling social posts
  • Scheduling appointments

When it comes to outsourcing or automating processes such as time and billing, accounting or payroll processes, one could argue that these functions are very important and urgent for a professional service firm. We agree, and that’s why these decisions should fall into the Important/Not Urgent quadrant first. When a proper solution is found through careful research and focus, these activities are off your plate so that you can focus more on billable client work.

Continue Reading: Tips to Outsource Accounting and Payroll Functions

 

Cornwell Jackson’s Business Services Department offers a wide range of outsourced financial services to serve professional services — including outsourced payroll processing and solutions to improve cash flow and productivity.  Contact us for a consultation.

Mike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s assurance practice and works directly with many professional services firms in the metroplex. Contact him at mike.rizkal@cornwelljackson.com or 972-202-8031.

Posted on Sep 26, 2016

Punch Clock

The Department of Labor’s Wage and Hour Division recently released some Q&As about the new federal overtime rule, which goes into effect on December 1, 2016.

Under the final rule, the standard salary level used to determine whether executive, administrative, and professional (EAP) employees are eligible to receive overtime will increase from $455 per week ($23,660 per year) to $913 per week ($47,476 per year) for a full-time worker.

As you know, employers are unique and have questions about what the impact may be on their industries and businesses. Here are some highlights from the Q&As:

Question WHD Answer
Are agricultural workers affected? They aren’t affected by the final rule, unless they qualify for one of the “white collar” exemptions.
Are blue collar workers affected? Workers like mechanics won’t qualify for exempt status because they do not pass the duties requirements for exemption, so they are entitled to overtime pay unless another exemption applies.
What about commissioned employees working at a retail establishment? There has been no change to the exemption for commissioned employees working at a retail establishment.
How are computer professionals affected? The hourly salary for a computer professional to be exempt from overtime is still $27.63. However, the weekly standard salary amount will increase from $455 to at least $913 per week on December 1.
Motor carriers Drivers, drivers’ helpers, loaders who are responsible for proper loading, and mechanics working directly on motor vehicles, which are to be used in transportation of passengers or property in interstate commerce, may be exempt from the overtime rule.
Outside sales employees The old and new salary requirements do not apply to outside sales employees.
What about part-time workers? The standard salary level to qualify for exemption is $913 per week on December 1. whether a worker is full-time or part-time.
Are employees with J-1 visas included? The new rule applies to foreign nationals in the U.S. with J-1 visa status such as alien physicians and research scholars.
What about a seasonal business that is only open, say, eight months a year? During the eight-month period, the employer would need to guarantee that at least $913 per week is paid to an employee exempt from receiving overtime. The employer needs to be concerned with the $913 weekly threshold, not the $47,476 annual threshold.
What’s the difference between discretionary and non-discretionary bonuses — and how are they affected by the new rule? The final rule allows employers for the first time to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level. Non-discretionary bonuses and incentive payments are forms of compensation promised to employees, for example, to induce them to work more efficiently or to remain with the company.

By contrast, discretionary bonuses (may not be used to satisfy up to 10% of the standard salary level test) are those for which the decision to award the bonus and the amount is at the employer’s sole discretion and not in accordance with any pre-announced standards. An unannounced holiday bonus is a discretionary bonus, because the bonus is entirely at the discretion of the employer, and therefore may not satisfy any portion of the $913 standard salary level. A non-discretionary bonus applies to the quarter it is paid rather than the period it relates to. An employer may make one final catch-up payment sufficient to achieve the required level no later than the next pay period after the end of the quarter.

What are some ways that an employer can comply with the new overtime rule? Employers have a range of options. For each affected employee newly entitled to overtime, they may:

  • Increase the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status;
  • Pay an overtime premium of one and a half times the employee’s regular rate of pay for any overtime hours worked;
  • Reduce or eliminate overtime hours;
  • Reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
  • Use some combination of the options above.
Can free housing be used to meet the minimum salary threshold? For executive, administrative, and professional employees to qualify for exemption from overtime, an employee must earn the minimum salary amount “exclusive of board, lodging, or other facilities.” The phrase “exclusive of board, lodging, or other facilities” means “free and clear” or independent of any claimed credit for non-cash items of value that an employer may provide to an employee.
The rules are different in my state. What should my business do?
The federal Fair Labor Standards (FLSA) doesn’t prevent a state from establishing more protective standards. If a state has a more protective standard than the FLSA, the higher standard applies there. To the extent the new minimum salary amount of $913 per week under the final rule is higher than the state requirement, the employer in that state must comply with the higher standard and pay not less than $913 per week to an exempt white collar employee.
Are comp time programs still allowed? Meaning that any hours over 40 can be banked to use later to either take time off or maybe get paid at end of year at straight time? Only employers that are public agencies under the FLSA (for example, a state government) can provide comp time in lieu of overtime premium payments.
Do teachers fall under the new rule?
Special rules apply to teachers. Here’s some guidance.
What are the penalties for non-compliance of the new overtime rule? Under the FLSA, employers in violation of the law may be responsible for paying any back wages owed to their employees, as well as additional amounts in liquidated damages, civil money penalties, and/or attorney fees.

 

These questions only cover some of the provisions of the new overtime rule. Time is running out for employers to understand what will be expected as of December 1. For more information in your situation, contact your payroll advisor.

Posted on Aug 10, 2016

Professional Service KPIs

Professional Service Organizations (PSO) often deal in Human Capital (i.e. they sell time), which creates pressure to manage quickly but not always effectively. Even as they advise business owners, leaders in a PSO neglect many of the same operational and financial issues in their own organizations. Before client service and profits begin to decline, PSO leaders must identify their operational inefficiencies and decide if they have the resources internally or externally to address them. A well-managed PSO anticipates change with the right key performance indicators — helping leaders look ahead instead of always over their shoulders.

Outsourcing has gotten a bad reputation ever since it became interchangeable with the concept of sending services to cheaper third-world countries — everything from IT help desks to customer service centers, simple tax returns and even some forms of legal assistance.

When we talk about outsourcing, we still use the term in a traditional sense, PSO KPI WP Downloadwhich is the delegation of non-core functions that will positively support firm revenue and professional or owner productivity. Commonly in small to mid-sized PSOs, such functions can include accounting and payroll, HR, IT and marketing.

At a certain scale, organizations will choose to manage such functions in-house. As a rule, however, growing companies can ramp up faster through an effective arrangement with outside consultants and vendors. The best outsourced partnerships act just like an in-house department with the same level of dedication and collaboration, but without the same overhead costs. In addition, the experts in these functions can educate leaders on KPIs, efficiencies, product and process selection and ultimately the selection of in-house staff when the time is right.

Some outsourcing functions, such as accounting and payroll, also provide a level of risk management by delegating sensitive financial and benefit information to highly trained professionals who consistently perform these functions for a variety of clients. Of course, you will want to obtain referrals and pursue due diligence to secure the right vendor relationship — one that understands your industry, workforce regulations or financials.

Often smaller companies will hire an office manager to handle their accounting, billing, taxes and payroll functions. However, growth in clients and employees quickly places a large burden on the original office manager to keep up with A/R and collections, payroll changes and financial reporting.

Rather than continue to hire support staff, PSOs should hire for the position most needed and augment back-office needs with services from their CPA. This move keeps the ratio of billable staff high, which leads to positive revenue per billable consultant and higher utilization.

Not all CPAs are equal in the level of accounting, payroll or tax services they can offer. Some provide the minimum in bookkeeping while others can support strategic planning, CFO-level consulting and related automation to increase the efficiency of KPI reporting and analysis.

A big question for owners is how well the outsourced relationship will align with existing processes, staff and the overall business model. In fact, will the outsourced relationship make the organization more efficient or just more expensive?

Here are the benefits you should look for:

  • Owners and senior staff can focus on core, billable services
  • Processes are added that increase efficiency and ease of reviewing ROI
  • Communication is seamless and timely
  • The link between business goals, operations and profits improves
  • Leaders are updated on changes or opportunities to optimize the service

At Cornwell Jackson, our tax and business services teams have worked with clients for many years to optimize back-office functions, but also assist with business strategy and planning. We have supported PSOs in determining the best KPIs, the optimal level of staffing and timely introduction of accounting tools and processes that enhance their growth. For more information on how your PSO can face today’s growth challenges head-on with a qualified outsourced relationship, contact us.

MR HeadshotMike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s ERISA practice, which includes annual audits of approximately 75 employee benefit plans. Contact him at mike.rizkal@cornwelljackson.com.

Posted on Jul 27, 2016

Professional Service KPIs

A well-managed PSO anticipates change with the right key performance indicators — helping leaders look ahead instead of always over their shoulders. Whether PSOs are considering M&A, structuring pricing or forecasting capacity, it comes down to numbers.

Every service organization should have a list of key performance indicators (KPIs) that measure how well the business is doing. KPIs will be different for every organization, but in general PSOs should look at the following five:

  • Annual Revenue per Billable Consultant – Total revenue divided by the number of billable consultants — this should minimally equal one to two times the fully loaded cost of the consultant
  • Annual Revenue per Employee – Total revenue divided by the total number of employees (billable and nonbillable) – this should be close two times the fully loaded cost per person
  • Billable Utilization – Calculated by dividing the total billable hours by 2,000 (the average utilization per employee) – this KPI is central to profitability and signals the need to expand or contract the workforce
  • Project Overrun – Percent of budgeted cost to actual cost – consistent project overruns eat into profits and signal inefficient project governance
  • Profit Margin – Calculated as revenue that remains after paying for the direct costs of delivering a project (payroll, transportation, materials, etc.) – can be fixed-price or not to exceed price or related to hourly time and expense.

PSO KPI WP DownloadBecause they sell knowledge and service, PSOs realize revenue growth and profits mainly by leveraging people effectively. Time is truly money in a PSO. Not every minute can be billed, and many PSOs support nonbillable activities such as volunteering to enhance their team culture. However, the ratio of billable activities must be high enough to achieve per person revenue goals and margins. By the same token, nonbillable employees must be a smaller percentage of the overall employment base compared to billable employees.

Effective KPIs are monitored and reviewed regularly. This can happen during senior leadership team or sales meetings, but the emphasis is on regular review. The biggest squeak gets the grease, and leaders must commit to change before they will see it in their organizations.

Here are some of the ways that PSOs can improve the five primary KPIs:

  • Leveraging senior-level professionals for high-level consulting and project oversight
  • Delegating project management and technical services to mid-level professionals
  • Right-pricing engagements
  • Defining and focusing on ‘A’ clients
  • Increasing efficiency of project delivery through processes, productization and automation
  • Outsourcing nonbillable or repetitive tasks that relate to running the organization

Such methods sound like common sense in theory, but we are still dealing with people. Depending on the size of the organization, prioritize which methods to pursue first that would make the biggest impact on profits.

  • Do you have low-profit clients that need to be transitioned to another service provider?
  • Do you have senior professionals unaware of tasks they could delegate (or unwilling)?
  • Are your processes inefficient because they are tailored too much for each client, and therefore impossible to delegate?
  • Are you underpricing your services or underestimating the actual time it will take to deliver them?
  • Are you sacrificing client service in the pursuit of new business?

Every PSO experiences these challenges. Being aware of them is the first step to discussing solutions to eliminate them.

In any event, one of the simplest ways to boost KPIs is to limit the time that owners and senior staff spend working in the business rather than on it. This relates to all of those time-consuming administrative, financial and operational tasks that must be done, but could be done more efficiently and cost-effectively by someone else — allowing professionals to focus on billable client work.

At Cornwell Jackson, our tax and business services teams have worked with clients for many years to optimize back-office functions, but also assist with business strategy and planning. We have supported PSOs in determining the best KPIs, the optimal level of staffing and timely introduction of accounting tools and processes that enhance their growth. For more information on how your PSO can face today’s growth challenges head-on with a qualified outsourced relationship, contact us.

MR HeadshotMike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s ERISA practice, which includes annual audits of approximately 75 employee benefit plans. Contact him at mike.rizkal@cornwelljackson.com.

 

 

Posted on Jul 13, 2016

Professional Service Organization

Professional Service Organizations (PSO) often deal in Human Capital (i.e. they sell time), which creates pressure to manage quickly but not always effectively. Even as they advise business owners, leaders in a PSO neglect many of the same operational and financial issues in their own organizations. Before client service and profits begin to decline, PSO leaders must identify their operational inefficiencies and decide if they have the resources internally or externally to address them. A well-managed PSO anticipates change with the right key performance indicators — helping leaders look ahead instead of always over their shoulders.

Professional service organizations historically can be a scattered and distracting place. Imagine all of these intelligent individuals — lawyers, accountants, engineers or architects — selling their knowledge and time. As owner and employee numbers increase, the business model is prone to inconsistencies and neglect without an executive leadership team that focuses a percentage of time on running the business.

Some of the common operational inefficiencies we’ve seen in PSOs include:PSO KPI WP Download

  • Aging accounts receivables
  • Lack of tax planning
  • Internal control and compliance issues
  • Inadequate investment in technology (i.e outdated)
  • Misalignment between marketing strategy and the business plan
  • Reactive recruitment

One of the solutions in PSOs is to assign a partner or shareholder to certain areas of the business: technology, marketing, HR, recruitment, etc. However, lack of knowledge in these increasingly specialized areas can result in minor errors at best and legal issues at worst. Before going too far down that road, leaders need to take time and really assess the organization’s capacity to manage these areas of the business internally — or if outside expertise is necessary as well as valuable.

Top Business Challenges for PSOs

Distinguishing one professional service from another is dependent on the owners’ ability to communicate value. When you sell an intangible service or knowledge, value is hard to pin down. It requires market research on your target audiences, their service needs, how your competition communicates value and why your existing clients say they choose your organization. Failure to take a hard look at value makes it difficult to sell, let alone attract talent or manage service expectations.

And these are some of the top challenges for PSOs to sustain good margins and avoid commodity price pressure. Even before the recession, PSOs were looking at ways to perform projects with fewer on-site visits, more milestones built in, use of more subcontractors and the ability to efficiently deliver measurable results. Clients are more likely than in the past to put a cap on spending and demand tangible deliverables that match PSO fees.

According to an annual survey of top-performing PSOs across the US by SPI Research, the most profitable PSOs are more specialized in their service offerings and/or they concentrate on high-growth segments where they are often the market leader. A significant portion of business comes through referrals thanks to their market leading reputation, and they have created a transparent culture of communication that attracts clients and employees.

According to the 2016 SPI Research survey, top-performing PSOs averaged net profits of just over 20 percent while average firms reported net revenues of 14.9%. Interestingly, the top PSOs referenced in the survey are incorporating some level of technology consulting in their practices.

Technology Is Partial Solution

PSOs have two challenges when addressing technology needs: operational and client focused. A 2016 survey by Computer Economics showed that PSOs were more likely to budget for operational IT spending — upgrades of existing IT — than investment in new IT solutions through capital outlay. One possible explanation is the migration of many organizations to cloud technology.

 When considering IT investment, it is important to look at internal as well as external investments. Demonstrating up-to-date technology is a primary recruiting tool because younger professionals prefer to work in organizations that leverage technology for efficiency (e.g. workflow, remote work, databases). The right technology investment can also help PSOs measure performance (e.g. CRM, web analytics, marketing automation, financial reporting).

In addition, technology is a selling point for clients in terms of delivering services cost-effectively, helping them translate historic data into smart business decisions and also forecast opportunities (e.g. portals, accounting software, point of sale systems, time and billing, enterprise systems).

However, new technology investment can only augment staffing, attract clients and increase revenue when it is aligned with the business strategy. Too many organizations invest in a software solution or peddle it to their clients without fully developing a strategy around its value — or providing staff training to use it effectively. Moreover, growth can delay timely investment in software or even cloud-based applications that can support efficient back-office functions.

Getting back to basics, PSOs must assess their vision and assign leaders to each area of the organization: finance, operations and marketing. Then they must name and prioritize their goals:

  • Increase productivity
  • Control cost
  • Attract and retain talented people
  • Solve complex business issues
  • Provide outstanding client service
  • Financial and tax compliance
  • Managing technology and future investments to stay competitive

How should finance, operations and marketing align to support these goals?

 Seek New Business Opportunities

One goal not mentioned yet is the development of new business opportunities. Successful PSOs are not only expanding services with existing clients, but also adding new clients. The most successful PSOs surveyed by SPI Research derived more than 20 percent of revenue from new clients. At the same time, they kept employee headcount growth lower than revenue growth through a larger sales pipeline and efficient resource management. While the slowest-growing organizations reported higher profitability, the danger was in neglecting new business opportunities in favor of short-term profits.

In a 2015 blog post, SPI Research cautioned PSOs from discounting, as survey respondents noted a prevalence of longer sales cycles and fewer winning proposals when the PSO offered price concessions. The promise of future work rarely made up for the loss in margin because clients that demanded discounting already perceived the service as a commodity.

Other ways of expanding business can happen by positioning the PSO as a leader in a particular industry vertical, thereby elevating the sophistication of the service or consulting offered. We have also seen PSO growth through M&A.

M&A activity in PSOs can include a “horizontal merger” in which firms within the same industry merge in order to add capacity and clients as well as expand geographically. PSOs can also explore product extension mergers by aligning or acquiring complimentary services such as an engineering firm adding general contractor services or a law firm adding collections services. Of course, such mergers must occur within the legal limits of the industries involved, and there are additional costs associated with M&A.

At Cornwell Jackson, our tax and business services teams have worked with clients for many years to optimize back-office functions, but also assist with business strategy and planning. We have supported PSOs in determining the best KPIs, the optimal level of staffing and timely introduction of accounting tools and processes that enhance their growth. For more information on how your PSO can face today’s growth challenges head-on with a qualified outsourced relationship, contact us.

Mike Rizkal, CPAMR Headshot is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s ERISA practice, which includes annual audits of approximately 75 employee benefit plans. Contact him at mike.rizkal@cornwelljackson.com.