September, 2011

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Article Index

Lease versus Buy – Considerations in the Decision
Article by: Jeff Brown

Businesses and individuals have two principal methods to acquire desired assets - leasing or purchasing.  Leasing, for our purpose, is the payment of rent (generally monthly) to obtain the use of an asset for a specific period of time, with a specific set of conditions as to the term of use and the amount of use. 


MN Manufacturing Economic Update
Article by: Dr. Ernest Goss

For the month of August 2011 reported September 20, 2011. Minnesota’s leading economic indicator from the monthly survey of supply managers was above growth neutral for the 25th straight month at 56.3, down from 57.5 in July.


HR: Using social media to find qualified candidates
Article by: Karen Emanuelson

With Minnesota unemployment hovering around 7.2% , human resources may be overwhelmed with responses to job postings. Some recruiters are recording as many as 500 applications for one position. Even with high unemployment, recruiters are finding positions that require specific skill sets are hard to fill.


The Secrets of Winning Engagement and Sustaining Momentum
Article by: Lynn Moline & Mike Braun

By the time you read this, chances are good that frost has ended the growing season for the industrious gardeners you read about in Part 1 of this article. That article pondered why many  gardeners work so energetically to produce great gardens, and it drew analogies to what happens in the workplace. Significantly, it noted that gardeners, like all of us, perform at higher levels and with stronger engagement when they have a vision, sufficient resources, relevant measures, and a good dose of autonomy.


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Lease versus Buy – Considerations in the Decision

Businesses and individuals have two principal methods to acquire desired assets - leasing or purchasing.  Leasing, for our purpose, is the payment of rent (generally monthly) to obtain the use of an asset for a specific period of time, with a specific set of conditions as to the term of use and the amount of use. 

It is important to note that not all financing arrangements termed leases are truly leases for tax purposes.  Some legal arrangements, generally identified by a very low option to purchase (dollar buy-out), are deemed to be a purchase for income tax purposes, and for this analysis.  A purchase is the acquisition of an asset for a given amount of money.

Important in the lease/buy decision are economic, tax and intangible factors, which are summarized below.  It is important to realize that each individual transaction must be reviewed, as these factors are not static.  Factors that should be considered include the following:

  •  Tax laws, especially depreciation, are scheduled to change at the end of 2011

    • For instance, assume an addition of a new $5 million manufacturing line.  In 2011, the entire $5 million is deductible.  In 2012, approximately $2,860,000 is deductible in the year of purchase with the remaining $2,140,000 being deductible over the remaining seven years.

  • Changes in tax rates are also under consideration.

  •  Interest rates may vary by type of transaction or asset acquired (i.e. special vehicle financing)

Type of Factor

Leasing

Purchase

 

 

 

 

 

 

 

 

 

Economic

As interest is built into the lease payment, a lower interest rate would lead to a lower lease payment.  Sales tax, if applicable, is paid over time with the lease payments.

 

Leases allow the user to pay for only the portion of the asset that they use.  However, this means that the user has to be constantly planning and paying for replacement of the asset. Operating restrictions are typical with limits on miles, hours of use, etc., being specified and charges levied for excess usage.

The purchaser owns the asset and is allowed the tax benefits discussed below.  With proper maintenance, it is probable that the user will enjoy a period of “free” asset use when the asset is paid off. 

 

The purchaser is not economically punished for usage of the asset in excess of plan.  In fact, the user is rewarded with lower fixed costs per unit of use.

 

Flexibility is somewhat sacrificed relative to leasing.

 

 

 

 

 

Tax

100% of payments, including the built-in sales tax, are currently deductible.

 

For many motor vehicles there is a small lease add-back.

 

No depreciation is allowed to the user.

Payments are split between principal and interest.  Interest is currently deductible, while principal and sales tax are subject to depreciation.  Special provisions to allow bonus depreciation and direct expensing of asset acquisitions are helpful in this regard.  Significant annual depreciation limitations exist for many motor vehicles.

 

 

 

Intangible

Leasing is helpful as a hedge against technological and economic obsolescence.  It also provides a means to allow users to buy only a portion of an expensive option on a budget. 

With ownership, the user is free to use the asset as he or she sees fit, and reaps the reward of proper maintenance and care. However, the owner is vulnerable to economic and technical obsolescence risks.

Any evaluation of the lease versus buy decision should include:

  • Financing options – there may be multiple options for each choice
    • Seller financing
    • Third party financing
    • Incentive financing
    • Lease terms
  • After tax cost of each option, incorporating
    • Amount and timing of payments
    • Amount and timing of tax benefits
    • Ability to utilize tax benefits effectively
      • Tax attributes are only as valuable as the benefit that they provide to a particular taxpayer
    • Anticipated changes in tax law

Then, intangibles need to be inserted into the analysis

  • Risk and impact of economic or technological obsolescence
  • Ability to abide by lease restrictions
  • Work involved in acquiring a replacement asset
  • Desire to drive or have newer equipment
  • Flexibility
  • Desire to have something finally paid for

Once this is done, information for making an informed decision is available.  However, as mentioned above, be cautious about adopting rules of thumb or otherwise shortcutting the analysis as the factors are dynamic, not static, and will vary by type of asset.

Jeff Brown, CPA and Senior Tax Manager for Eide Bailly LLP. Jeff may be reached at jbrown@eidebailly.com or 952.918.3558.

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MN Manufacturing Economic Update

For the month of August 2011 reported September 20, 2011. Minnesota’s leading economic indicator from the monthly survey of supply managers was above growth neutral for the 25th straight month at 56.3, down from 57.5 in July.

Components of the index for August were new orders at 57.7, production or sales at 58.2, delivery lead time at 58.7, inventories at 58.2, and employment at 48.6. “Both durable and non-durable manufacturing firms in the state are making modest gains in business activity.  Medical equipment producers and metal product manufacturers are experiencing very healthy growth even as growth slows somewhat," said Goss.

Dr. Ernest Goss of Creighton University, used the same methodology as The National Association of Purchasing Management to compile this information. An index number greater than 50 percent indicates an expansionary economy, and an index under 50 percent forecast a sluggish economy, for the next three to six months.

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HR: Using social media to find qualified candidates

With Minnesota unemployment hovering around 7.2% , human resources may be overwhelmed with responses to job postings. Some recruiters are recording as many as 500 applications for one position. Even with high unemployment, recruiters are finding positions that require specific skill sets are hard to fill.

A 2010 survey by Jobvite, Inc. found that while 40% of companies surveyed do not measure the impact of social recruiting, 58.1% had hired through a social network. A second study found almost a third of U.S. companies use social media as a major hiring source.

Norma Beasant, PHR, began using social media for sourcing and recruiting in 2006, when social media was rarely used to recruit. “Job boards such as Monster, CareerBuilder and others were quite popular,” said Beasant.

Today, manufacturers looking for general labor can still use Monster and similar big boards, suggests 19-year recruiting veteran Sally Savage. It is a different story when seeking to fill positions requiring specific skill sets. In-house recruiters, staffing agencies and headhunters are turning to social media to find qualified candidates for hard-to-fill roles. "One of my recent clients experienced 89% growth by cutting out job boards and interacting with job seekers online and at networking events. With more money going to her bottom line and higher placements, she's become an advocate of social media," said GirlmeetsGeek founder Kate-Madonna Hines.

Using social media for recruiting is similar to old fashioned networking. The key is understanding where potential candidates may be found online. “You need to target where your candidates are,” said Savage.

According to Marni Sampair, President of The Constant Search, Inc., recruiting passive candidates in the manufacturing industry begins with trade associations. Visiting and joining an association’s social media site provides access to the members’ names.

LinkedIn

LinkedIn is often considered THE social media platform for recruiting and offers a section called Corporate Recruiting Solutions (http://talent.linkedin.com/), with exclusive resources and tips.

Recruiters may search LinkedIn for candidates in several ways, including keyword searches and by group membership. If you search “Minnesota Manufacturing” groups on LinkedIn, you will find 12 groups with those keywords in their name or description, including 433-member Minnesota Manufacturing Network, a LinkedIn group comprised of professionals with at least ten years of manufacturing experience in a leadership role. The Manufacturers Alliance LinkedIn group (http://www.linkedin.com/groups?home=&gid=1969763) with 850 members, offers networking online with other MA members.

Many LinkedIn groups have a Jobs tab to post open positions. LinkedIn members may join up to 50 groups. Membership is free and includes access to fellow group members.

Another tip from Sampair is to search the “Answers” section for potential candidates. “Search questions and answers that would pertain to someone with expertise in ‘Six Sigma’ or ‘Rapid Prototyping.’ Their profile will be connected to that discussion, and you will be able to gather names.”

Reaching out to candidates is an art. “I invited potential candidates to meet with me for informational meetings,” said Beasant, who recently left her recruiting role to open Talento, a human resources consulting firm. “I was able to add many candidates to my talent pipeline, which I used whenever I had job openings. Today, my LinkedIn network has grown to 780 connections, and I regularly stay in touch with many of them.”

Leaders in social recruiting place an emphasis on hiring passive talent, and keep an active dialogue going with potential candidates. Savage invites potential candidates to connect with her on LinkedIn, then encourages them to send her open positions to their connections. She and Sampair also regularly post openings on LinkedIn status.

Facebook

With over 750 million members, Facebook is emerging as a recruitment tool. In addition to posting openings on a company’s Facebook wall, messages about job openings may be sent directly to a company’s Facebook page connections.

Companies can add applications such as Work For Us (www.work4labs.com) to create a custom job board on the company’s Facebook page. Candidates may submit resumes directly through the app or the company’s website. Another application, Linkup, offers employers a way to feed jobs automatically from the company’s website to the company’s Facebook page and Twitter accounts.

Savage regularly uses Facebook in her role as a senior IT recruiter. “There is a SAP Community Network page with nearly 25,500 people on the site. I see who is posting (something relevant to my open position), then find that person on LinkedIn and Facebook.” Savage also reviews the person’s connections for additional candidate possibilities.

In addition, ad campaigns on Facebook and LinkedIn can be created to target candidates based on their profile attributes such as education, interests and location.

Twitter

Twitter is another social network recruiters are using to find job seekers, says Beasant. “Even with messages limited to 140 characters, people and businesses are able to connect. The easiest way to recruit is to tweet jobs you have available.”

Marking tweets with a “hashtag” highlights them for active job seekers. Common recruiting hashtags include #MNjobs, #hiring and #career as well as industry specific #ITjobs, #sales and #marketing.

 “Do a quick search on Twitter (search.twitter.com) for anyone discussing a specific keyword, then start following people based on that information. You can search for people by location,  industry,  interest, and more,” says Beasant.

Third party applications such as TwitJobSearch (http://www.twitjobsearch.com/) also provide opportunities for companies to promote their open positions on Twitter.

Checking out those who follow a Twitter potential candidate may lead to other candidates.

Whether it’s on Facebook, Twitter, or LinkedIn, this type of “stealth recruiting” on social media is common. Sourcing passive candidates and employment branding –both at the core of social professional networking –are top recruiting trends, according to Global Recruiting Trends Survey 2011White Paper by LinkedIn. The study showed that in addition to HR staff recruiting on social networking sites, employee referral programs are anticipated to grow as a means to identifying and recruiting candidates.

Recruiters suggest finding new employees using the reach and the passion of current employees. If current employees send out postings with links to a recruiting website or company Facebook business page, the job openings reach a wider audience. “Even though social media requires time and effort, it is a great tool to find potential candidates. I was able to save companies many dollars in recruiting fees,” said Beasant.

What about the argument that not everyone is on social networks? How do you find a manufacturing foreman or welder using social media?  While the ideal candidate may not be using social networks, his or her kids, uncles, cousins and neighbors are, says Savage.  “They help with the networking. All I do is social media recruiting. I find all of my candidates that way.”

Karen Emanuelson is the owner of Reciprocate LLC (www.ReciprocateLLC.com), a Twin Cities based marketing and social media training and strategy company. She may be reached at kemanuelson@ReciprocateLLC.com or 651-3540-6313 and encourages MA members to connect with her on LinkedIn (www.LinkedIn.com/in/karenemanuelson).

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The Secrets of Winning Engagement and Sustaining Momentum

By the time you read this, chances are good that frost has ended the growing season for the industrious gardeners you read about in Part 1 of this article. That article pondered why many  gardeners work so energetically to produce great gardens, and it drew analogies to what happens in the workplace. Significantly, it noted that gardeners, like all of us, perform at higher levels and with stronger engagement when they have a vision, sufficient resources, relevant measures, and a good dose of autonomy.

But as every manager discovers, while factors like vision and resources play an important role in performance, their mere presence doesn’t reliably produce desired results. The reality is that human beings, whether they are gardeners or production engineers or sales reps, do what they do because of the consequences of that behavior. The real reasons gardeners engage in gardening behaviors are the beautiful flowers and vegetables they produce, the admiration of the neighbors, the satisfaction of putting fresh food on the family table. The vision and resources nudge them forward, but the consequences hold the real power.

We don’t often talk about behavior and consequences in the workplace, but we should. Everything that happens in an organization happens because of behavior—what someone does or says—not because of plans, intentions, motivation, or timetables. And all human behavior is shaped by consequences, both encouraging and discouraging. Unfortunately, many managers don’t realize that; additionally, the wrong consequences are often unintentionally at play.

For example, customer service workers at one company were supposed to update demographic information by entering it into a new data management system every time they talked with a customer. The workers actually valued the information because they needed it to perform their jobs. But they persisted in keeping it in their own notes instead of entering it into the system. The  manager continually asked the employees to enter the data, but to no effect. Finally, in total frustration, the manager directed an administrative assistant to collect everyone’s notes at the end of each shift and enter it into the system for the employees.

Sound familiar? Behaviorally speaking, from the employees’ viewpoint there were strong and immediate encouraging consequences for not entering the data. And there were few, if any, discouraging consequences for not doing so other than having to listen to the manager’s nagging pleas. Not entering the data allowed them to avoid the discouraging consequences of the extra time spent and aggravation endured every time they tried to enter data into the unfamiliar system. On the other hand, keeping their own notes came with the encouraging consequences of having the information at their fingertips whenever they needed it. In addition, when they avoided doing the unpleasant data entry job themselves, someone else would do it for them. Clearly, all the consequences encouraged them not to use the new system.

Leaders who understand how consequences shape behavior are far more successful at getting things done through others. A few examples of the basic types of consequences will illustrate how to use consequences in the workplace.

  • Tangible consequences. These are the most obvious and most frequently used consequences. They include compensation, bonuses, movie tickets, pizza lunches, and other large and small “perks.” They can have some beneficial effect at shaping behavior but they are not as reliably effective as the next three types of consequences.
  • Work process consequences. This category of consequences has to do with how easy or hard the work is as a result of the behavior. Think of using an i-Phone vs. a standard cell phone. In a manufacturing example, when production cell members adopt lean behaviors that let them consistently meet their hourly production numbers, life in the cell is less stressful; performing in that way provides its own natural reward. Work process consequences are especially powerful for sustaining behavior; however, reaching that point often requires the use of other consequences until the natural consequences become obvious.
  • Activity consequences. These are similar to quid pro quo consequences: if you do this less enjoyable task first, then you can do the one you like. A real-life example is the manager who procrastinated on writing an important report he disliked doing. His boss shaped his behavior by telling him that he could represent the organization at a conference (something the manger viewed as rewarding) only if he completed the report. It worked.
  • Feedback consequences. The impact of feedback (or lack thereof) is seldom fully credited for the influence it has on behavior. Most people in today’s organizations are starved for feedback. Positive encouraging feedback, and feedback that helps individuals to achieve greater mastery of their jobs, is perhaps the most powerful consequence. It’s easy to provide and it is grossly underused.

One final point: Within each category of consequences, the most powerful are those that are most important to the individual, the most immediate, and the most certain to occur. In terms of the gardeners discussed earlier, the consequences of key behaviors like watering and weeding meet all these criteria and thus are very powerful in shaping the gardener’s behavior.

Understanding how to use consequences to shape desired behavior is an indispensible tool for every manager. Of course, providing a vision, priorities, goals, resources, and autonomy also are critical for performance. But when it’s time to make things happen, nothing works like consequences. Whether the task is to launch a new strategy, improve the safety record, or sustain an improvement initiative, leaders who know how to use consequences are more successful than those who don’t.

Lynn Moline, owner of Lynn Moline Associates, Inc., is a consultant and trainer who specializes in executive development, executive team alignment, and planning. Mike Braun is a partner at CLG, a company that provides behavior-based strategy execution and performance improvement services.

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