Did “Fat Finger” Syndrome contribute to Thursday’s market plunge?

By: Tracy Levine, President, Advantage Talent, Inc.

Thursday the stock market dropped 347.8 points by closing.  During the day, the stock market had plunged even lower, almost 1,000 points.  The world news alone does not explain this huge plunge.  Yes, there looks like there might be a hung parliament in the U.K. with no decisive winner and Greece’s economy has crashed.  All of this is old news.  Back in December political watchers were predicting that there would be no clear victory in the Parliamentary elections.  The news about Greece’s economy came out last week.  It is to be expected that the stock market would be affected by these events but not to the degree it was on Thursday.

Wall Street Veterans are blaming it on “Fat Finger” Syndrome.   “Fat Finger” Syndrome is when a trader makes an error in keying in a quantity or presses the wrong button. According to CNBC, the spotlight has been focused on a Citigroup trader who has been accused of having “Fat Finger” Syndrome and keying in the wrong number.  Over the years sophisticated computer trading systems running algorithms which trigger trades under preset conditions have become the norm at many Brokerage Firms.  Many believe that the Citigroup Trader’s supposed “fat finger” mistake contributed to Thursday’s huge market plunge and triggered automated trading by these algorithm programs.  Purportedly, the trader meant to key in a $16 million futures contract but instead typed in $16 Billion.  Citigroup has denied that a trader at their firm had made an error while keying in a trade.

It is surprising that something like this has not happened sooner.  In reality computer trading over the past twenty years has affected the markets.  Thursday’s supposed “fat finger” mistake only served to magnify the impact of automated trades on the stock market.   As Washington looks at financial regulation reform, it will be interesting to see if anyone will address the impact that one human error can have on the market in this age of fast, market responsive computer generated trading.

Post Update: May 07, 2010 est.—The following new articles contain more information and speculation about what happened on Thursday.  There is a debate over whether this was human error or a swing caused independently by computer trading.  Either way it caused investors to take notice yesterday.  The debate will continue as the incident is investigated further.

Did a Citibank Traders Error Worsen the Market Collapse? By Sam Guston http://www.dailyfinance.com/story/investing/did-a-citigroup-traders-error-add-to-market-collapse/19467905/

NYSE & Nasdaq’s 60% Cancellation Mystery: http://www.cnbc.com/id/37019184

Trading System May Have Dangerous Flaw: http://www.cnbc.com/id/37016611

The Blame Game: NYSE vs. Nasdaq:  http://www.cnbc.com/id/37017292

20 Questions for determining whether a Contractor is a W-2 vs. 1099 Independent Contractor

By: Tracy Levine, President, Advantage Talent, Inc.

Becoming an Independent Contractor is a great way for Executives in transition to earn money in this tight economy. For Corporations that have downsized and need help, Executive Consultants can be the answer. However, it is important that Companies engage these Consultants correctly. The IRS and DOJ are cracking down on employers who claim contractors as 1099 contractors when they are not. There is much more to a contract than negotiating the hourly rate. When negotiating a contract, it is important to consult the appropriate professionals, such as, an attorney and/or a tax accountant or go through a Executive Staffing firm. In fact, under the IRS Code most Financial Executive Consultants do not qualify as 1099 Contractors!

Employee status under common law. Generally, a worker who performs services for your Company is your employee if you have the right to control what will be done and how it will be done. This is so, even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. If an employer-employee relationship exists, it does not matter what it is called. The employee may be called an agent or independent contractor. It also does not matter how payments are measured or paid, what they are called, or if the employee works full or part time. (IRS Publication 15, Circular E, 2008 Pg. 8)” The IRS has provided examples of what is and is not a W-2 Employee vs. a 1099 Independent Contractor.

The corporation that classifies a W-2 employee as a 1099 Contractor faces the following fines:

*A breakdown of back tax penalties(http://tinyurl.com/5u0d):

15.30 % Social Security Tax (on income up to the cap, plus 2.9 % of income above that cap),

20.00 % Federal Income Tax, +6.20 %

Unemployment Insurance, 41.50 % of the contractor’s pay (IRS 3509).

If it is determined to be intentional, there can be jail time involved.

The Federal Government is not the only one cracking down on employers who misclassify W-2 Employees as 1099 Independent Contractors. Many states have become aggressive on preventing what they see as Corporations not paying taxes that are duly owed. In this economy where budgets are short at the Federal and State Levels, the agencies are demanding stricter adherence to employee tax laws.

Some of the red flags for the IRS include a former employee hired back as a 1099 Contractor. A contract-to-hire where the employee starts off as a 1099 employee then converts to a W-2 Employee. If someone is acting as a Contract Interim CEO, CFO or Controller for a company while the company looks for a permanent solution, or while someone is out on sick leave or maternity leave, under the IRS 20 Questions (see below) these situations would probably fail as a 1099 Contract Position.

According to information published by the IRS, around $64 million in taxes and penalties were collected from over 800 companies that misclassified workers in the most recent year reported. These numbers are only going to continue to go up as the IRS has promised to randomly audit several thousand companies. The Federal Government Accountability Office estimated that employee misclassification resulted in the underpayment of an estimated $2.72 billion in Social Security taxes, unemployment insurance taxes and income taxes in 2006, the last year for which figures are available.

It is important for both Companies and Interim Executives to set up the appropriate relationship in the beginning for the protection of everyone involved. In the current environment, now is not the time to be a do-it-yourself contract negotiator and leave out the experts. A full summary can be found at http://www.irs.gov/pub/irs-pdf/p15a.pdf .  If you fill out a Form SS-8  (http://www.irs.gov/pub/irs-pdf/fss8.pdf), the IRS will help you determine whether the contract employee should be classified as  a W-2 Employee or a 1099 Contractor.

For information on how Advantage Talent, Inc. can help you, please contact Michael Levine at Mlevine@AdvantageTalentInc.com.

The following is a list of 20 questions the IRS uses to determine if a worker is an independent contractor or employee. The answer of yes to any one of the questions (except #16) may mean the worker is an employee.

1. Is the worker required to comply with instructions about when, where and how the work is done?
2. Is the worker provided training that would enable him/her to perform a job in a particular method or manner?
3. Are the services provided by the worker an integral part of the business’ operations?
4. Must the services be rendered personally?
5. Does the business hire, supervise, or pay assistants to help the worker on the job?
6. Is there a continuing relationship between the worker and the person for whom the services are performed?
7. Does the recipient of the services set the work schedule?
8. Is the worker required to devote his/her full time to the person he/she performs services for?
9. Is the work performed at the place of business of the company or at specific places set by the company?
10. Does the recipient of the services direct the sequence in which the work must be done?
11. Are regular oral or written reports required to be submitted by the worker?
12. Is the method of payment hourly, weekly, monthly (as opposed to commission or by the job?)
13. Are business and/or traveling expenses reimbursed?
14. Does the company furnish tools and materials used by the worker?
15. Has the worker failed to invest in equipment or facilities used to provide the services?
16. Does the arrangement put the person in a position or realizing either a profit or loss on the work?
17. Does the worker perform services exclusively for the company rather than working for a number of companies at the same time?
18. Does the worker in fact make his/her services regularly available to the general public?
19. Is the worker subject to dismissal for reasons other than non-performance of the contract specifications?
20. Can the worker terminate his/her relationship without incurring a liability for failure to complete the job?

www.AdvantageTalentInc.com

A Shift in the Burden of the Liquidity Crunch

Liquidity is tight.  CFOs are doing whatever they can to keep a reserve of ‘dry powder’ cash.  This includes stretching account payables as far as possible, even if it means alienating some long term vendors.  Many vendors have been slammed by a surge of unpaid bills.  Now these same companies are receiving notifications that customers are going to take longer to pay.  The following is typical of the wording included:

“We are changing our payment policy to 90 days effective (Month/Day), 2009. Please plan your cash flow requirements accordingly.”

                With these two simple sentences, the CFO of one company is effectively sharing the credit pressure with another CFO.  Changing the payment policy puts additional pressure on the vendor to increase their bank borrowings and to increase the timeframe in which this company takes to pay their vendors. An end to this cycle does not seem to be possible in the near term, as the economy continues to experience negative momentum.  As a result the accounts receivable DSO (days sales outstanding) will continue to increase, and an associated increase of time to pay vendors.  To make this less painful for all parties involved, CFOs are taking steps to improve their partnerships by being open as to why the action of stretching the payment cycle is being taken.  Sending a clear message that the steps are not arbitrary and will not be forever goes a long way.

By: Tracy Levine, President, Advantage Talent, Inc.    TLevine@AdvantageTalentInc.com

Dashboards:Managing the Information Flow for Meaningful Strategic Planning

Ultimately, it is up to the CFO to make sure that the financial information that is shared with other members of the Executive Management Team, the Board of Directors or the Private Equity Group accurately reflects the true health of the company and the performance of the company so that relevant strategic planning can be implemented.  To help streamline the information and to have a more timely flow of information, many companies are using Dashboards with varying degrees of success and satisfaction.

A good dashboard delivers information in a customized manner that is tailored to the industry and the individual company.  Effective dashboards all have the following characteristics: 1.) Includes meaningful key performance indicators; 2.) User friendly summaries that are timely and transparent so that management can be proactive instead of reactive in running the business; 3.) Allows management to use a collaborative approach to create best practices; 4.) Effectively and accurately tracks performance indicators, such as, profitability, backlog, cash flow requirements, inventory levels, receivables management, etc.

Some of the red flags of an ineffective dashboard are the following: 1.) Reams of data that provides minimal insight; 2.) Lack of ability for customization which is particularly a problem for businesses that have grown rapidly through acquisitions where each subsidiary is using a different system; 3.) Excessive readjustments to information, incomplete information or incorrect information that renders the reports minimally useful; 4.) Lack of buy in by management of the importance of assuring the information is entered in a timely manner.   Most managers are expected to do more with less time and resources.  They are forced to prioritize their work and filling in the information for the dashboard rarely makes it to the top of anyone’s list.  This is particularly true of sales management which is typically paid on closing deals not on the amount of reports that are filled out.  Getting buy in by others and showing them the value of participating is vital to gathering complete financial data.

Cost Cutting without Sacrificing Human Capital

In the current economy, corporations are asking Senior Management to take a closer look at the bottom line and cut costs.  This creates a koan for the CFO.  The dismal state of the economy has necessitated that corporations eliminate jobs for short term survival and economic health.  A global approach using cold hard numbers and math is the deciding factor on the percentage of jobs that have to be eliminated. 

A common concern among CFO’s is how do you keep from decimating and sacrificing the company’s human capital that will be needed when it is time to turn the company in a positive direction or to support growth when the economy rebounds.

Companies are taking the follow actions to reduce cost without sacrificing the human capital that they had already invested in developing.  The following were some of the steps being taken: 

1.) Reducing work week hours;

2.) Implementing partial month furloughs;

3.) Creating situations where employees can job share; and

4.) Reducing the pay of employees.   

These measures save money for the company while allowing the company to retain more of its human capital.  However, it creates a unique environment that management has to address.  Many employees just see these steps as a precursor to the next reduction in force.  Senior Management needs to clearly communicate their vision for the future of the company and how the employees are an integral part of this success.

The Financial Professional’s Role in Communicating with the Sales Organization

        Many managers from both the Accounting Team and the Sales Team have made the same observation.  Communication between Accounting and Sales is often like trying to mix oil and water.  It’s not done easily.

        In this case, flexibility is ‘king’ when it comes to communications between Accounting and Sales.  The Financial Professionals thought process is ‘I need all of the important information, at the right time, in the right format, and it must be accurate’.  The sales manager and members of the sales team think ‘I’m being held accountable by management to hit my sales numbers … forms, what forms; I don’t have time for paperwork?’

         The Accounting team must become more flexible in their communications with the Sales teams, and must in fact ‘sell’ to the Sales team why certain information provided by the Sales organization to Accounting is required to fully support the Sales organization, and that Accounting can help Sales teams sell more products/services when information flow is effective.  The Accounting team needs to know which vendors to pay first to assure there is adequate inventory to sell during the next spike in demand.  Financial Managers also need to understand sales trends so that requests may be made to the bank for funding of special sales initiatives.  Without good information flow, both Accounting and Sales will be frustrated, and the Sales team will sell less than they otherwise should.

CFOs Driving Corporate Growth

CFOs Driving Corporate Growth

By:  Michael Levine, Principal, Advantage Talent, Inc.

 

Many CFO’s ask me how to increase their job longevity.  There is only one answer to this question.  Expand job responsibilities beyond assuring the financial statements are presented on time.  The senior financial executive has to be actively involved in the growth of his or her company.

 

Through my CFO and Controller Roundtables and direct communication with many senior financial executives, I’ve learned about ways financial executives are driving the growth of their companies.  Examples that fuel the internal corporate growth engine include:

 

1      Utilizing a variety of financing vehicles to obtain additional liquidity.

2      Working with the executive team to develop sales professional compensation, which rewards salesmen for focusing on sales with greater profitability. 

3      Working with sales reps in the field when they encounter perceived internal corporate “red tape”.  In many cases, there are opportunities to streamline processes by easing overly restrictive controls or eliminating previously unidentified bureaucratic bottlenecks.

4      Initiating meetings with industry specific business strategists to provide guidance for growth.

5      Evaluating and improving health and other corporate insurance policies to attract and retain employees.

6      Developing tax strategies, which produce significant savings to free up cash for other productive uses.

7      Finding value in liabilities by taking aggressive stance on discounts by vendors, and getting rebates on credit cards, all of which provide cash for growth.

8      Relocating plant controllers to the factory floor vs.‘ivory tower’ offices.  This allows them to better see what is going on in real-time.  They are part of the floor team and therefore are more accessible to concerns which otherwise would not be communicated to the proper parties for action.

9      Negotiating with banks to reduce account and credit card fees.

10   Doing homework on competitive vendors and using information to achieve best pricing without necessity of changing vendors.

11   Securing State tax credits for software installation (training credit) and Federal Income payroll tax credits for certain geographic areas.

12   Developing strategies on timing of inventory purchases to balance tax reduction, holding costs, and pricing trends.

13   Working with the purchasing department to develop policies and procedures for inventory, supplies, and even capital expenditures to eliminate waste and maximize rebates.

14   Analyzing sales profitability by vendor, and subsequent vendor selection.

15   Analyzing sales profitability by customer, and subsequent ‘firing’ of certain customers.

16   Implementing travel and entertainment policy to maximize cash flow and eliminate waste.

 

Several CFOs are taking an outward focus and evaluating business opportunities that create competitive advantages.  Examples include:

1      Expanding current business territory to increase profitability with limited investment.

2      Creating a strategy and business plan to enter a new business sector.

3      Going on sales calls to better understand challenges being faced by sales reps in the field.  One such sales call resulted in development of a customer financing plan with an independent financing company which allows the customer to make payments over time, and also mitigates corporate A/R exposure, helps collect past due accounts and allows company to increase the size of customer orders.  As a result, finance is viewed as an asset to the sales team rather than an adversary. 

4      Investing strategically in IT (Information Technology) to improve customer experience when interacting with the company website, providing easy product catalog access, allowing customers to efficiently perform their own inquiries on product features, appearance, availability and secure order status updates. 

5      Creating online E-Commerce solution allowing customers to purchase directly online which provides for cost savings in customer service areas and improvement of customer satisfaction at the same time.

6      Selecting facility sites for maximum strategic advantage.

 

By taking on responsibilities that improve profitability and growth of the company, the senior financial executive should be able to better position his or herself for a long-term relationship with their current employer.  Come to one of the roundtable meetings and learn about what your peers are doing to drive growth in their companies.   Also, contact me with other questions or ideas at mlevine@advantagetalentinc.com.

Originally published in the CFO Advocate-The Newsletter for the CFO Roundtables.

Banks vs. other investors including Private Equity Groups and Public Shareholders

We are hearing the following from CFOs and Senior Fiancial Executives.

     Banks are still doing business but in a decidedly different manner than before.  This has created some rather unique situations.  Banks appear to be trying to be proactive and thoughtful in handling what seems to be the next inevitable bump in the road…..the rising corporate bankruptcy rates resulting in corporate loan defaults.

Banks vs. other investors including Private Equity Groups and Public Shareholders

     Many companies have several investors, the bank that provides the securitized loan; the Private Equity Groups who provided seed money along the way and the public shareholders.  Typically, the goals and objectives of these groups are in line with each other in the short run and in the long run.

 

     Most bank agreements contain language that states upon default/foreclosure, the bank has the legal right to replace senior management.  Typically, this standard clause is never executed before the banker pulls the line of credit or the bank, in corporate bankruptcy situations, as the primary creditor just liquidates a company’s assets to recoup money.  Banks are not in the business of running corporations.  In an apparent strategic move banks may decide in some instances that liquidation of assets is not an option because of the current state of the economy and a different strategy needs to be employed. 

 Scenario:

  • A bank may have issued credit to several companies in similar lines of business. 
  • One business seems to have weathered the storm better than their peers and is not currently in violation of the bank covenants and considering the environment seems very likely to be able to survive the economic downturn in the long run and eventually become profitable once again.  The senior management is solid.  However, unless some other source of money from another investor is infused into the company it looks like the company will within a short period of time be in violation of their loan covenants.
  • The second business has already breached their loan covenants and the loan is in default.

     The old ways may in some instances be passed over for a new strategy.  The banker is approaching the company that has strong management with an interesting proposition.   We know that you will probably break your loan covenants during the next quarter.  However, we feel comfortable with Management and want to make a proposal to you.   When the loan covenants are broken, we have the ability to pull your primary source of financing and/or fire everyone in Senior Management.  However, we will let you keep your loan and your job but with one catch.   We are going to be ousting the management of another business whose loan is in default and will be merging this business with your company, leaving you as the Management of the new entity.

     While this may be a proactive solution on the bankers’ side, it is not without side effects for Senior Management, private equity investors or public shareholders.   Senior Management is left to assess how to manage and merge two companies in a successful manner that does not derail the stability of their original business.  The private equity groups and shareholders are left with their investment significantly diminished, and a company unrecognizable when compared to the company they originally invested.  Only time will tell whether out of the box moves like this by bankers will be beneficial or harmful in the long run.

Bank Covenants and Senior Management:

     Most Banks have always viewed senior management as part of the mix when deciding whether or not to issue any type of corporate loan, securitized or non-securitized.  Now it seems that this informal review is becoming a bit more formal when it comes to small cap and mid cap companies.  It seems that some banks have already started, and others are going to be possibly following suit by adding the following line in loan agreements, “Firing the CFO other than for cause, triggers a loan default.” 

     The rational for this additional written covenant given to a CFO last week follows:  “Bankers have developed trust and confidence in the CFO that they will do the right thing in administering the credit agreement and in managing the business ethically.”  When the banker sees the CEO firing the CFO for reasons other than for cause, a huge “red flag” is raised.  From past experience this normally signals a change in what the bank signed up for when the loan was granted.

     One CFO who started off on the banking side explained that in bad times, numerous situations occur to cause more tension between the CEO and CFO.  In closely held public and private companies, independent of size, the CFO or Senior Financial person is put in the position of saying “no” to Management that is used to being able to keep their “sacred cow” departments, employees or perks or initiating any idea without regard to serious analysis of ROI (Return On Investment).  In difficult economic environments every allocation or use of a company’s assets are important to the company’s growth and/or survival.   In these types of showdowns, history shows the Senior Financial Executive is left to confront management and many times is forced to resign or is fired for “cost” cutting reasons.  In the perception of many bankers, particularly as it relates to small or mid cap companies, removing the CFO or Senior Financial Executive as a “cost” cutting measure or forced resignation is typically not considered a positive strategic business move and signals possible Senior Management problems that can lead to credit issues.

     Most Bankers consider the Senior Financial Executive, typically the CFO, an integral strategic and operations Executive, not someone who just gathers the numbers and publishes the reports.  A firing not based on cause, or forced resignation is interpreted as a sure sign that there is a disagreement related to the strategic and operating goals of the company among Senior Executive Management. This results in concerns on the banker’s part.