Finance: Four lessons to remember this year

2020 hindsight: 4 lessons to remember this year

While Kern County’s unemployment rate has dropped to its lowest level since March 2020, many companies are still dealing with the acute impacts of the economic and social disruptions of the last year. Innovative companies can apply what they’ve learned to excel in 2021. Here are four ways that

Mark Riley companies can build resilience, and weather future challenges, while being better positioned to capitalize on emerging opportunities. tunities facing your company right INVEST IN YOUR EMPLOYEES FINANCIAL DISCIPLINE ISN’T JUST FOR now, whether it’s market expansion, Just as you’re taking steps to safeHARD TIMES reaching a new customer segment guard cash flow and business opA thorough, proactive review of internal processes and key relationships can help protect your company. For example, cash flow issues are a common source of business failure, so it’s important to examine your supply chain and customer base for vulnerabilities that could impact your business and review customer payments to identify issues before they become larger problems. Cutting expenses in a defensive and reactive posture can have unintended consequences. Instead, create “what if” scenarios now and plan allocations for each. If the time comes, you can respond with a thoroughly vetted plan. or digitizing more of your business model. Consider potential hurdles you’ll face in pursuing these opportunities as it will help you formulate an actionable, prioritized plan specific to your situation. MAKE CYBERSECURITY A BUSINESSCRITICAL PRIORITY Cybercrime is more of a risk in today’s remote work environment, so companies must prepare themselves. Criminals realize that workers are less protected when working remotely and are launching malware campaigns targeting people with insufficiently secured devices. To reduce vulnerable attack surfaces in your company, look to strengthen mobile erations, it’s essential to protect the wellbeing of your employees. Management should support employees even more holistically and proactively than before. Leaders can schedule more frequent communications with staff and play an active role in broader wellness areas like financial stability and mental health. Comprehensive wellness programs that support employees’ physical, mental and financial health are more important than ever today. The percentage of employees who rate their financial wellness as good or excellent declined from 61 percent in 2018 to 49 percent in 2020, and as many as 57 percent of employees feel their well-being has a great impact on their DON’T LET UNCERTAINTY DETER YOU device management, ensuring secu- productivity, which could have major FROM GROWTH rity tools and protocols are in place. ripple effects on a company’s health. The M&A market shifted in 2020 due to the impact of the coronavirus and widespread digital transformation. Companies with strong working capital and cash reserves could have a significant opportunity to put that to work through a merger or acquisition, especially if they have limited debt. If your company is not in a position to pursue M&A activity, develop a strategic plan for future growth. Start by identifying the top opporCompanies should also update and enforce a security policy for remote connectivity. Policies should provide guidelines on the safe use of public Wi-Fi, prohibit workers from transmitting sensitive information and require the use of VPNs and well-protected home routers. Finally, cybersecurity training can teach employees how to put essential safeguards in place while keeping cybersecurity top of mind across the company. Financial wellness tools and education should cover a range of needs including saving for retirement, planning for healthcare costs, budgeting, saving for college and managing debt. While no one can predict what’s to come in 2021, these lessons from 2020 can help companies reignite growth and plan for financial success in the months ahead.

DEPOSITPHOTOS.COM

Guidelines on governance and wealth management for nonprofits

In December 2019, when you could still gather in a classroom sans mask, I was invited to give a lecture as the presenter for the Dean’s Executive and Research Seminar series at Cal State Bakersfield. I had a packed house and the presentation was well received (though I have on occasion cleared out bigger rooms than that). Little did we all know how much the world would change in just three short months.

The subject matter of the presentation was governance and wealth management, now more timely than ever with the impact of the pandemic on the economy and markets. Warren Buffet is fond of saying, “You don’t know who is wearing a bathing suit until the tide goes out.” With local foundations and endowments, the tide went out starting in February 2020 with the reaction of securities markets worldwide to the COVID-19 pandemic, and the implosion of oil prices when the Russians and Saudis were unable to agree on

Frank J. Colatruglio production limits. As fundraising for nonprofits has slammed to a halt, many organizations have been forced to rely on their accumulated reserves and endowments, shining a spotlight on how well they have managed the fiduciary responsibility to preserve the real value of the resources they have been entrusted with. Real value means the value after inflation, distributions to beneficiaries and the associated costs to manage the assets. UCLA, for example, uses a required return target of 5 percent plus CPI net of asset management costs. The CSUB Foundation uses 5.25 percent plus CPI net of investment expenses pertaining to their endowment and reserves. CALPERS uses a 7 percent target, and it should be noted its chief investment officer was recently terminated after underperforming this return requirement for two years in a row.

One of the entertaining (sad I know) activities I have engaged in as a result of having my work desktop at home has been the review of quite a few of the 990 tax returns required to be filed by local nonprofits, as well as their audited financial statements and Investment Policy Statements (IPS). These documents are

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required to be furnished by the nonprofit upon request to whomever may wish to see them and are the minimum disclosure requirement for these organizations. Reviewing these documents can be a bit like solving a forensic accounting crossword puzzle. They always tell a story, and it can be one the organization is hoping you don’t look into too closely.

To those who do look, what you find can be surprising. Audited Financial Statements that do not disclose the attribution for changes in the value of assets, for example. Asset allocation structures that contain too many non-traditional assets. Too much short term cash and cash equivalents and not enough traditional growth type holdings. Over weights in international equities or restrictions within the Investment Policy Statement handcuffing the actual asset manager by imposing limitations that should be delegated to the CIO or asset managers as they take into consideration economic and market conditions subject to a variety of changing factors. Persistent long-term underperformance vs. the relevant peer group under the guise of taking a “conservative” approach to asset allocation. This can be just an excuse for poor performance and an improperly specified risk profile.

A well-written Investment Policy Statement is the first order of business when establishing a governance framework. This document provides the blueprint, so to speak, for the organization to stay on track toward accomplishing short- and long-term objectives established by the board of directors. Typically it will include a description of the organization and its objectives, current and future beneficiaries, the risk profile and annual return objective, strategic and tactical asset allocation guidelines and annual planned percentage distributions from any endowment, just to name a few. It is important to note that foundations and other nonprofit organizations are typically perpetuities with no mortality, unlike a natural person. As such, the most serious risk to most nonprofits is the loss of purchasing power or real value over time due to systemic underperformance vs. a properly specified benchmark and stated Investment Policy return objective.

Organizations with outdated or poorly designed Investment Policy Statements that do not focus on the preservation of the real value of an endowment or asset pool after costs, inflation and distributions may lose ground that will be difficult to make up. This problem may have been exacerbated this year if the finance or investment committee did not have asset managers in place prior to February who understood how to reallocate assets in order to benefit from the historic rally we have seen in technology, health care and fixed income since the Powell “credit backstop” press conference of March 23, 2020.

Once objectives are established and the IPS is in place, implementation of the policy is next. This typically involves evaluating and hiring one or more professional asset managers which the board then will have the responsibility to superintend. The CIO (small foundations will often hire an outsourced chief investment officer, or OCIO) will typically recommend managers to the investment committee consistent with the asset allocation guidelines and, once hired, the board must monitor performance and risk adjusted return vs. properly designed benchmarks. They must replace managers who after a suitable time period are not providing superior risk adjusted results relative to their peer group. A CIO or OCIO should have proper industry qualifications, such as a CFA or CIMA designation and preferably be an expert in global macroeconomics and technical analysis.

On a related note, an organization must have separation of governance and fiduciary responsibility from the actual individuals or organizations managing the money. That means you or any closely related individual to you should not under any circumstances have a seat on a board of directors at the same time that you or any closely related individual provides discretionary investment management services to an organization. The fiduciary line between governance and implementation of policy should be respected at all times by the organization and by providers of professional services to the organization.

Communication with the public is another important principle. Public nonprofits taking in tax deductible contributions should have a website, and it is important for them to make timely, transparent disclosures of financial information to the public. Providing access to the 990, audited financial statements, performance reports, current revisions of the Investment Policy Statement and conflict of interest disclosures satisfy minimum reporting transparency requirements for nonprofits. The public can gain access in this way to historic income and expense data, balance sheet info and how much is being paid out to current beneficiaries vs. organizational expenses, how much money is received in contributions. They should in addition provide a synthesized report of performance for the last one, three and five years and since inception with peer group and benchmark comparisons. Using such a report, the interested community member can understand whether the organization has been successful in consistently performing in line with the stated performance objectives as stipulated by the Investment Policy Statement.

If you serve on a nonprofit board you should understand principles of governance regardless of whether you are on the finance or investment committee. Your obligation is to the current and future beneficiaries of the organization. If you agree to serve on the investment committee, you should understand how to construct and evaluate an Investment Policy Statement, and be aware of how important it is to have one in place. Consistency of risk adjusted return and proper diversification for the economic cycle is what matters and avoiding heavily concentrated exposure in individual issues. Whether someone may have made money on their own investments is not a qualification to serve on the investment committee. Prospective board members should know that reporting transparency is a fiduciary obligation and organizations must make timely disclosures of financial results to the public. If you are a member or contributor to a nonprofit organization that you care about, you should ask the executive director about how the organization communicates its results to the public. Ask about online disclosure and whether the website contains all of the documents necessary to review the financial performance of the organization.

Making sure that our nonprofits are governed properly is the responsibility of everyone in the community who may benefit from the services and/or facilities provided by the organization. We should all want to know what is being done with public money, making sure that there are no undisclosed conflicts of interest and that board members are vetted for competence, not just whether or not they will write a big check to the organization.

Frank J. Colatruglio, CFA, CFP, is managing director — investments for Colatruglio Wealth Management Group of Wells Fargo Advisors. He has been an adjunct lecturer in finance at CSUB and is a member of the CFA Institute and the CFA Society of Los Angeles. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company.

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Finance

Focus shifts to small business for US recovery

Helping small businesses passed in December and signed COVID-19 pandemic could result loans in 2020 to help shore up the SBDC free services will be critical survive the financial into law by former President in net losses starting at $3.2 trillion nation’s small businesses during to the success and survival of Kern ravages of the COVID-19 Trump. The December action was and reaching as much as $4.8 these dire times. President Biden’s County businesses. pandemic is the centerpiece of an extension of aid to small busi- trillion in U.S. real gross domestic continued focus on these efforts is The U.S. Small Business AdminPresident Joe Biden’s economic nesses that Congress approved in product over the course of two heartening. istration may not have the largest recovery plan. the spring. years. Throughout 2020 and into this budget in the federal government.

Shortly before his inaugura- The rollout of the SBA’s $284 bil- Real GDP is a measure, adjusted new year, the Small Business De- But its influence and power are in tion, Biden unveiled a $1.9 trillion lion Paycheck Protection Program for inflation, that reflects the value velopment Center at Cal State Ba- its programs and services. American Rescue Plan, which in mid-January places greater and the quantity of final goods and kersfield, an extension of the U.S. The agency does much more includes $15 billion emphasis on smaller services produced by a nation’s Small Business Administration, than provide loan guarantees. It in grants to help the businesses and allows economy in a given year. has expanded its services – includ- supports about 900 small-busihardest hit businesses qualifying businesses The pandemic’s economic ing offering free counseling, edu- ness development centers, counand $35 billion for small that received money impact depends on factors such cational programs and webinars seling centers and networks for business financing. in the first round of as the duration and extent of the to help local entrepreneurs apply women, minorities and veteran

The plan also in- COVID relief to apply business closures, the gradual for available loans and adapt their entrepreneurs. These networks cludes money for the again for funding. reopening process, infection rates operations to the harsh pandemic and centers are instrumental in distribution of vaccines Loans are capped at and fatalities, avoiding public realities. getting small businesses back up to help curb the deadly $2 million, as opposed places and pent-up consumer A primary feature is the one- and running. pandemic, which has to $10 million in the first demand, according to research hour “Webinar Wednesday” The Small Business Developclaimed more than Kelly Bearden PPP. In addition, money by the USC Center for Risk and series, Managing Your Small Busi- ment Center at CSUB is one of five 400,000 American lives can be used for pur- Economic Analysis of Terrorism ness through the pandemic, that service centers within the Uniand shuttered thousands of small poses beyond “payroll protection.” Events (CREATE). began in March 2020. The free versity of California, Central Calibusinesses across the nation. Such purposes include operation, The researchers found that the weekly webinars provide pan- fornia SBDC Regional Network. It

Biden must convince a closely property damage and supplier and mandatory closures and partial demic relief updates on available assists small business owners in divided Congress to support his worker protection expenditures. re-openings alone could result in a federal, state and local funding Kern, Inyo and Mono counties by plan. “We have to act and we have Eligible applicants have been ex- 22 percent loss of U.S. GDP in just options, tax credit programs, providing free consulting, small to act now. We cannot afford inac- panded to include nonprofit orga- one year and an even greater loss employee programs and other business training and research. tion. … They’re hurting and they’re nizations, destination marketing of GDP over two years. Other key opportunities for employers and For more information, go to www. hurting badly,” Biden said, as he organizations, housing coopera- factors, they noted, will influence business owners. Past webinars csubsbdc.com. unveiled his plan. tives, etc. how disastrous the losses may be. can be found on the CSUB SBDC

Biden’s proposal comes on the Research by University of Clearly Congress and President YouTube channel. heels of the hard-fought compro- Southern California economists Trump responded appropriately As the Biden administration mise COVID rescue plan Congress concluded in December that the with two rounds of grants and rolls out additional programs, Kelly Bearden is the director of the Small Business Development Center at Cal State Bakersfield.

In 2021, challenges remain

2020 will certainly be a contender for one of the most extraordinary years in our lifetimes. The COVID-19 pandemic (and the ensuing shutdowns) has had a devastating effect on a large number of businesses. Others have been lucky enough to survive, and others even thrived. What the pandemic has taught, if anything, is the need to adapt, be in tune with our finances and adapt some more.

California once again introduced new laws that provides additional challenges to businesses including the following: ■ Minimum wage increases ■ Pay data reporting (SB 973) for larger employers ■ California Family Rights Act affecting employers with 5 or more employees rather than 50 ■ Additional safety regulations including provisions for COVID reporting.

Previously we had stated that the beginning of a new year is a great time for business owners to review and consider financial performance against the previous year. The impact of the pandemic makes this comparison meaningless for some, but for others it is still well worth the exercise.

Generally, we would guide business owners to measure 2020 against past years. Your own circumstances will determine if this is the right approach. If you are looking to develop a budget for 2021, then using your financial accounts for 2019 may well be a more appropriate year to develop benchmarks against.

Whichever year you use to set your budget and benchmarks, some guiding principles apply: if your business primarily sells products then focus on your gross margin; if your business is a service business then your operating margin is key.

These are key ratios used to measure business performance, and ultimately this will impact the value of your business too. More importantly, by comparing margins over several years, you can evaluate the fluctuations and trends in profitability. MANAGE OPERATING EXPENSES

The pandemic has caused many of us to evaluate what our general day-to-day spend is anyway. Operating expenses are associated with the general running of your business. Here are some areas to evaluate: ■ Has your business gone more virtual? Are there fixed operating expenses associated with running a physical office that you no longer need? ■ Review your ongoing (forgotten) expenses. Do you have the best cellular and internet plans for your business? It’s amazing how willing the big carriers are in continuing promotional discounts in order to retain your business. ■ If you have found that your staff can work remotely, what other opportunities are there for remote workers? Can you improve the productivity of your staff? What additional training would benefit the overall output of your staff? ■ Outsource functions: Can you outsource high cost non-core functions such as human resources, technology and finance? Could you use a lower cost state to remotely support your business? ■ Technology has continued to improve. Robotic Process Automation is emerging as a powerful tool to automate repetitive tasks such as data entry. KEEP A FINANCIAL DASHBOARD

Keeping a financial dashboard is one of the most efficient means of tracking performance of your business. However, there is an old computer programmer saying, “garbage in, garbage out.” Even when using accounting software, it’s important that you have a defined chart of accounts and that your bookkeeping and administrative staff clearly understand which expense is entered into each category. Your chart of accounts should reflect the type of business you are in: a small service company will survive on 10 to 12 categories. Larger businesses are likely to need more.

Track your performance throughout 2021 against your previous year and budget targets. Ensure that you track the important metrics to your business whether it be sales growth, margins, employee turnover or customer satisfaction.

The better your understanding of your profit drivers, the better you’ll be able to maximize the value of your most valuable investment: your business.

Kevin Lowther