In the current state of affairs, many leaders are thinking about the future. Forward-thinking is an essential part of business leadership, to be able to guide your employees and steer your company in the right direction.
In uncertain times, it is important to understand many different outcomes could take place. If you are trying to build a model based on these outcomes, you are going to need help.
Commonly, most financial leaders within an organization need assistance predicting their cash needs, drawing a mental picture of potential profitability, and learning how to make better data-based decisions for the company.
To plan for the future effectively, a leader must develop a plan. This type of plan is a financial model, and its aim is to forecast a business’s results over an appropriate time frame.
Given the current environment, due to the outbreak of COVID-19, we recommend creating a nine-month cash flow forecast to support your business through the end of 2020.
We recommend creating this and keeping three possible business scenarios in mind:
Your original plan
A probable case based on current data
The worst case
To help you, we suggest brushing up on those Excel skills to create more elaborate and complex financial models. These models will enable you to modify assumptions giving you the ability to see the outcomes immediately. If you are not an Excel guru, don’t worry, even a simple financial model will provide you with more insight into your business than you likely have today.
3 Scenarios And What They Should Tell You
The original plan scenario should be your current strategic business plan and budget for the year. If you do not have a budget, you can create this model, as outlined below. This scenario acts as the baseline for the other two scenarios: probable case and worst case.
The probable case scenario is what you expect to happen based on current information. For some businesses, this could mean growth, and for others, it may mean a reduction in revenue.
The worst-case scenario should depict what the business would look like if revenues drop, are delayed, and/or unforeseen expenses occur. This scenario reflects the most serious or severe outcome. In this scenario, forecasting in this way is critical, so preparations can be made to ensure the business can still operate under such adverse circumstances.
The best approach to building these scenarios is to start with the original plan. Your original plan scenario should be the easiest to forecast, and you might already have it if you created a strategic business budget for 2020. The numbers used in the original business plan will act as the baseline for creating the other two scenarios: probable case and the worst case.
A quick way to get started building the financial model is to calculate a monthly average of the last 12 months for each expense category. At Signature Analytics, we recommend companies break down their expenses into categories or buckets to understand their business expenses better.
Once you have that data, use this average as the baseline amount for each expense account. Then ask yourself, is this baseline still a reasonable estimate to help forecast for the next nine months? Did anything significant change before COVID-19?
Depending on your income channels, revenue can be forecasted using the 12-month average. If you have more accurate data, then, by all means, use it. For both revenues and expenses, look back at the same months in the previous year to see if any seasonal patterns or trends should be reflected in the forecast and make adjustments where necessary.
Lastly, if you never created a strategic business plan and budget for the year, there’s no time like the present to get that started, so you are not flying blind over the next several months.
Once the Original Plan has been created, determine what percentages (these would be increases or decreases) of revenue and expenses should be applied.
Manual adjustments can be made to any of the monthly numbers based on knowing future activities within the business. Think through possible disruptions to your employees, your supply chain, and your clients.
Worst Case Scenario
The final scenario is weighing in the negative impact of disruptions to your employees, your supply chain, and your clients. You might approach this as a broad decrease in revenue (15%, 25%, or even higher) to understand how that would affect your business and your liquidity.
Scenario planning should bring to light any warning signs that can trigger major strategic pivots to decrease a company’s risk.
One other helpful tool in scenario planning is to utilize storytelling. The Wall Street Journal reports that “data-driven stories enable a team to picture the various futures the organization might face; strong narratives challenge conventional wisdom and management’s assumptions, but should be logical and plausible.”
Remember, forecasts by nature are not factual; but, having the ability to use available forecasts to develop scenarios can provide some relief.
Simple scenario analysis allows you, as the business leader, to work through the assumptions and influences that directly affect your business. This creative and focused thought process can support you in times of high stress when making thoughtful, yet data-driven decisions for your business beyond that “gut feeling.”
As a business owner, you run the risk of bankruptcy if you’re not on top of cash flow management. A full 82 percent of business failures are caused by poor cash management, according to a US Bank study.
So, is it easy enough to bring in more money than your business is spending? Although it sounds simple in theory, having a positive cash flow encompasses much more than profitability. Even if your company is currently profitable, it is still at risk for negative cash flow. One common example of this is if you have obligations for future payments that you cannot meet because you’ve mistimed incoming funds.
By maximizing your company’s cash flow, you can help your company receive profits faster, meet targets in a shorter time frame, and lower your operating expenses. Wondering how to improve cash flow in your small business? These 10 tips can help you improve cash flow for your company.
1. Anticipate and Plan for Future Cash Needs
Keeping accurate, timely, and relevant (ART) accounting records allows you to build a forecast for your business based on historical results. At the very least, businesses should be reviewing their cash flow monthly.
For example, if you find that you are anticipating a future need for extra cash, you may want to start talking to lenders about a bridge loan to help pave the way for future financing. Similarly, if you can anticipate large expenses ahead of payout, you’ll be able to plan your other obligations accordingly to avoid cash flow surprises.
2. Improve your Accounts Receivable
By actively managing your accounts receivable, you can stay on top of outstanding invoices and decrease the time it takes to get paid.
One way you can do this is by encouraging customers to pay early. For example, if your payment terms are net 30 days, consider offering a slight discount for customers paying net 10 days.
Are you currently waiting for checks to arrive? Offering a variety of payment options will make it as easy as possible for a customer to pay you, such as ACH or credit card payments. While these options may come with processing fees, getting money faster is better for your business if cash flow is tight and eliminates time & labor spent on collection. These options can help prevent you from stacking up credit card debt to cover expenses.
3. Manage your Accounts Payable Process
Establishing and organizing your accounts payable process will be essential to improving your company’s cash flow. If your accounting department doesn’t already use software to help manage your accounts, it is a good idea to invest in one. Next, you should communicate with your team which invoices are most important so they can be paid first. Remember, do not let unpaid invoices slip through the cracks.
Another tip? Try to get to know your vendors and extend payment terms as long as possible. Most vendors will ask businesses for net 30, but once you build up a positive relationship, they may be more inclined to offer net 45 or net 60. After all, the longer you have to pay, the more time you have to get money in. You can use a simple payment agreement template to help you when creating your financial contracts.
4. Put Idle Cash to Work
Another way to improve business cash flow is by putting idle cash to work. Your idle cash is money that is not earning any income.
Chances are if you have large balances sitting in non-interest-bearing accounts, you can find a better place for them to live. You could consider moving them to an interest-bearing account that may earn .5% or 1% APY. Another option is to invest the money in expanding your business, use it to decrease your debts and lower your interest payments, invest in new technology, or prepay some expenses.
Most commercial banks offer a sweep account, a type of account to help maximize earnings on your income by automatically transferring money from your business checking account to your savings account. The sweeps happen at the close of business each day, and you can set the amount, typically in $500 increments.
Should your checking account dip below your minimum requirement, the funds will be automatically transferred back into your checking account to cover the outlay. This risk-free option makes it easy to build your savings for a rainy day or your next major investment.
6. Utilize Cheap and/or Free Financing Options
If you are looking to invest in your company through low to medium-cost purchases such as upgrading your computer system, buying new furniture, or replacing your company vehicles, you should take advantage of financing options that have low or no interest for the initial period of the loan.
Using this strategy for a business loan will help you save money by cushioning the cash hit to your business. If you pay off the full loan upfront before the interest rates kick in, you will save even more, therefore, making the most of your investment.
7. Control Access to Bank Accounts
To maintain positive cash flow, it is crucial to protect your assets. The best way to eliminate fraud and unauthorized use of your company bank accounts is to make sure the proper safeguards are in place.
Common safeguards include keeping the number of people who can access these accounts to a minimum, securing your IT infrastructure, frequently updating passwords, protecting your credit and debit card information and bank accounts, and using a dedicated computer for banking.
8. Outsource Certain Business Functions
It’s not necessary to hire full-time employees for every business function. You should evaluate your business needs and identify areas where it may be more cost-effective to outsource. IT management, human resources, accounting, payroll, and marketing are all functions that could be outsourced.
There are many firms, including Signature Analytics, that specialize in providing experienced professionals to handle specific business functions and manage cash flow issues. Outsourcing can save your business money, offers a flexible staffing model during the ebbs and flows of your business cycle, and it can also increase your efficiency.
9. Renegotiate Existing Service Contracts
Another tip to increase business cash flow is to review service plans and contracts regularly. Start by looking at your internet, phone bills, copiers, software support, and janitorial/building maintenance contracts to pinpoint opportunities to save.
Improved technologies and increased market competition have driven prices down on many services, so it’s worth taking the time to shop around for a better deal.
10. Maintain a Weekly Rolling Cash Forecast
A rolling cash forecast is a good practice for improving cash flow overall. You don’t need expensive programs to do this; Excel will easily allow you to project a weekly rolling cash forecast. You should include all estimated inflows, such as customer receipts, and outflows, such as vendor payments and payroll. Record this data on a weekly basis at least.
Your rolling cash forecast will help you plan staffing needs, commit to new vendors, and ensure funds will always be available to make payroll and vendor payments. As a bonus, your forecasting will help you estimate and understand your company’s sales cycle.
By implementing these strategies when managing cash flow, you will quickly get the upper hand on your company’s finances and learn how to increase cash flow within your business — so you will soon reap the benefits.
At Signature Analytics, we have a team of expert accounting and financial professionals including accountants, controllers, financial analysts, and CFOs; all dedicated to providing the best level of service at a price that makes sense for your business.
For additional assistance with cash flow management, developing detailed financial projections, or identifying capital requirements, contact Signature Analytics today for a free consultation.
Do you spend late nights and weekends struggling to keep up with your company’s accounting records? Or worse, does this time intervene with the time spent running the operations of your business?
Are you unable to assess the profitability of your business or perhaps have difficulty understanding the cash requirements for the next 60, 90, or 365 days?
Do you feel your margins could be improved but aren’t sure how to evaluate them when looking at your financial statements?
Would some assistance in projecting your business operations over the next few years help you establish priorities with your employees?
If you answered yes to any of these questions, then you are in good company. Many business owners and executives feel the same way and there are ways you can get the support you need to move your business ahead.
The first step is acknowledging that, although operations are the most key aspect of any business, accurate financial information is vital to making important business decisions. Having visibility into cash flow and knowing where your margins can be improved will enable you to take your company to the next level.
Now the next step is determining if hiring a full-time accounting resource to get your company’s financials in order makes sense from a cost and expertise standpoint.
Is there enough work for a full-time accountant?For many companies, a 40-hour a week accountant would be in excess of the time required to perform the basic accounting functions they may need, e.g., monthly close process, issuing invoices, entering and paying bills, performing payroll, etc.
Is there too much work for your current full-time resource? And are you asking them to do things beyond or below their skill set? This is a very common occurrence with any role in a growing business. This is a lose-lose situation for everyone involved and can lead to internal turnover.
What level of experience will they need to have – CFO, controller, staff accountant? If you are not in a position to support the costs of more than one accounting resource, will you hire a CFO and then over-pay them to do basic staff-level accounting? Alternatively, you could hire a staff accountant and task them with CFO responsibilities; however, both of these options can cost your company significantly and lead to ineffective decision-making.
If your company needs the resources of a complete accounting team but is not in a position to support the costs and management time of that entire, full-time team, then outsourcing your accounting functions is a very viable, flexible, and turn-key option for your business.
Outsourced accounting companies such as Signature Analytics provide you with flexibility in terms of the number of hours of service to receive, provide a higher level of experience through oversight by more senior-level individuals, and ensure efficient service by experienced accountants (staff accountants through CFO level expertise). The accounting teams at outsourced accounting companies work with multiple clients so they have identified time-saving methods that allow them to complete challenging tasks in significantly less time than a typical bookkeeper.
In addition to acting as the financial arm of your business by providing the resources of a highly experienced accounting department on an outsourced basis, there are a number of other situations in which hiring an outsourced accounting company to handle your financial information might make sense for your business:
Preparing for a financial statement audit or review
Many business owners believe that a financial statement audit is a healthy process for their business and provides confidence to their investors in the financial information; however, most do not realize the resource drain that an audit can have on their business due to the significant number of requests for supporting information and the technical accounting expertise which must be applied to the financial statements. Due to independence restrictions, audit firms cannot assist in performing the accounting functions at the companies they audit and therefore must rely on management to determine proper accounting rules. These issues tend to cause significant overrun bills from the audit firm due to the inefficiencies experienced and can be extremely costly for a business. Engaging an outsourced accounting company can provide management with the peace of mind that they have a team of accounting experts – most of which have previous experience performing audits – that understand what audit firms are asking for and know how to produce that information in a timely manner.
Investors requesting financial projections
Investors love to see what the future of their capital will produce so that they can assist in both financial and operational decisions; however, many business owners do not have the expertise to prepare financial projections and therefore may provide information at a level not detailed enough for the purpose or may be missing significant costs which need to be considered. Outsourced accounting firms that provide support with cash flow management and projections have CFO-level experts who are experienced in understanding a business operation in a very timely fashion and can translate such information into the future potential results of the organization.[gap height=”10″]
Missing out on potential tax savings
When a tax provider receives your financial information they may not search into all of the accounts to find tax deductions. If transactions have been classified to incorrect accounts, tax preparers may not be aware of their existence and therefore not consider simple deductions. A simple example would be meals & entertainment expenses, often a deductible expense, in which some transactions may end up recorded in office expense categories or supplies or miscellaneous. Unless the tax preparer knows that such expenses may be improperly classified, the deduction will go unreported resulting in higher income tax. An outsourced accounting company can organize accounting information and work directly with tax professionals to help identify as many tax savings as possible.
Looking for capital investment from financial institutions
Perhaps you have a capital requirement in the near future and plan to approach different financial institutions. Providing financial information with obvious errors, inconsistencies, or lack of organization could severely impact your ability to raise capital as it may be challenging for the lenders to truly understand the results of the business without transparent financial information. When hiring an outsourced accounting company, you can be confident that the financial statements are timely and accurate. Furthermore, they will provide you with a high-level financial resource that can assist in preparing analyses of the financial information in a professional manner making the lender proposal process less arduous. These statements may be used as a resource to assist in conversations with those providing capital assistance to ensure a complete understanding of the business’s results of operations.
Businesses still seeking relief from the impact of COVID-19 may be able to find it in the second round of PPP loan legislation passed by Congress in late December of 2020. The Consolidated Appropriations Act, 2021 seeks to overcome some flaws of the first round of the Paycheck Protection Program (PPP) while providing additional assistance to businesses still suffering in the wake of the COVID-19 pandemic.
Even those who were unable to get funding during the first round of PPP loans can apply for their first-draw under the new guidance. With relaxed rules on which expenses are eligible for forgiveness and specific funding set aside for lenders who operate in lower-income areas, businesses owned by POC, and small businesses, this round of PPP loans is better suited to serve the American population as a whole equally.
Since the program’s initial launch, our team of experts have had a chance to review the program in greater detail and want to provide our findings below. We know navigating through this legislation can be tricky, just know we are here to provide support and guidance to business leaders in need.
Quick Overview of Changes:
Dramatically expanded payroll and non-payroll expenses eligible for forgiveness
Additional clarity on loan terms
Updated limits on loan amounts
Clarity on forgiveness and tax savings opportunities
Flexibility on the covered period of the loan
Revenue reduction proof requirements
PPP Loans: The Changes for Round 2
To be eligible for PPP loan forgiveness, borrowers must use the funds on approved, covered expenses. Under the new legislation, the 40/60 split is still required: borrowers must use 60% of the funds on payroll expenses and can use up to 40% on approved, non-payroll expenses.
However, covered expenses in both categories have been expanded. Existing payroll costs included:
Salary, wages, commissions, tips
State and local payroll taxes
Retirement plan contributions
Expanded payroll costs now include:
Group life insurance
Group disability insurance
Group vision insurance
Group dental insurance
Existing covered non-payroll expenses included:
Interest on mortgage payments, excluding prepayments
Interest on debt obligations incurred before the covered period
Additionally, the new legislation expanded forgivable non-payroll expenses to include:
Certain operational expenditures like software and cloud computing service payments used to facilitate business operations, accounting, service or product delivery, payroll processing, billing, inventory, and HR functions
Property damage costs incurred during public disturbances that happened in 2020 and were not covered by insurance
Select supplier costs including payments to suppliers of goods that are essential to operations
PPE equipment and other worker protection expenses incurred to comply with CDC, HHS, OSHA, or state and local government authority after March 1, 2020, until the president’s national emergency declaration expires
Note that expenses for HSAs, QSEHRA, and Commuter Benefits like mileage reimbursement are still not covered under the new PPP guidance.
PPP Loan Terms
The new legislation brings additional clarity to the terms of PPP loans. Here are some of the highlights:
Interest rates are fixed at 1%
Interest is non-compounding and non-adjustable
No yearly fees
No guaranteed fees
No prepayment penalty
Borrowers are not required to provide collateral or a personal guarantee
Providing this guidance ensures that lenders cannot take advantage of borrowers seeking PPP loans. Additionally, while the maturity for PPP loans is five years, payments aren’t required until borrowers know how much of the loan will be forgiven.
Borrowers who do not apply for PPP loan forgiveness, however, will have to make payments within 10 months of the last day of their covered period.
Loan Funding Limitations
For first-draw borrowers, there is a limit of $10 million or 2.5 times the average monthly payroll and healthcare costs; whichever is less. Some exceptions may exist for restaurants and other hospitality businesses.
The loan limit for second-draw borrowers is $2 million and includes a stricter method of calculation, which is:
2.5 times the average monthly payroll and healthcare costs in the year prior to when the loan was received or the 12-month period prior to when the loan was made
Most hospitality and entertainment businesses, including hotels and restaurants, are eligible for up to 3.5 times the average monthly payroll and healthcare costs using the same methodology as above
If borrowers with an outstanding, unforgiven PPP loan would have been eligible for more resources under the new, expanded covered costs, they may amend their loan application and request a higher amount. Loans that have already been forgiven are not eligible to be amended.
Forgiveness and Tax Deductibility
With the expanded eligible expenses, forgiveness is much easier to receive. Additionally, the SBA has simplified the forgiveness process so that borrowers with loans of $150,000 or less may utilize a one-page application.
Tax benefits also exist for PPP loans. The funds are not included in any gross income that a business is required to report. Better yet, expenses that are paid for using the funding from a PPP loan are tax-deductible. That creates a double tax benefit as no taxes are due on the amount received and business can deduct expenses paid using the funds.
The Covered Period
New legislation has provided additional flexibility as to when borrowers use their PPP loan funds. While the covered period for the first-draw remains unchanged, second-draw borrowers can choose a covered period anywhere between 8 to 24 weeks after receiving the loan. This provides much-needed freedom to utilize the funds as necessary and eliminates the restrictions faced during the first-draw covered period.
Updated Eligibility Requirements
First- and second-draw loan recipients each have specific eligibility requirements. Both types of applications require that a business was operational before February 15, 2020, and remains operational. The first difference occurs in the required number of full-time, part-time, or seasonal employees:
First-draw applicants: Must have less than 500 employees
Second-draw applicants: Must have less than 300 employees or less than 300 employees per business location
Additional Eligibility Requirements for Second-Draw PPP Loans
Proof of 25% Revenue Reduction
One of the more stringent expectations of second-draw borrowers is the required proof of revenue reduction. In order to qualify, borrowers must show a revenue reduction of at least 25% in the first, second, or third quarter of 2020 when compared to that same quarter in 2019. The following are all required to be included in the revenue calculation:
Sales of products or services
All revenue from every source in whatever form received or accrued by the borrower and any affiliates
The funding from first-draw PPP loans is, however, excluded from this revenue calculation.
Only loans totaling over $150,000 will require borrowers to submit documentation to prove revenue decline during the application process. However, all borrowers will need to submit this information when applying for forgiveness. Here are some forms that will help provide the proper documentation:
Relevant tax forms
Quarterly financial statements
Fully Used First-Draw PPP Loan
In order to be eligible for a second-draw PPP loan, borrowers must have already used or will use their entire first-draw PPP loan.
The following are eligible businesses for both first- and second-draw PPP loans:
Certain 501(c)(6) non-profit organizations
Faith-based organizations that have less than 150 employees
Housing cooperatives that employ less than 300 people
Applications are ready for borrowers now and will remain live until March 31, 2021. Funds are first come, first serve so it’s best to apply as soon as possible. Finding lenders is easier than ever using the SBA’s Lender Match website.
Before applying, it’s best to gather these documents for both 2019 and 2020:
Dane Cook, an American comedian, whose brother who was his business manager and took advantage of him for about $12 million
Girl Scout parents who were caught stealing money from their daughter’s cookie sales (average estimates of $10,000)
Bernie Madoff, an American market maker, investor, and financial advisor, who committed the highest financial fraud in US history worth almost $65 billion
These examples might seem unlikely to happen to your company, and as a small business owner, you may believe your organization is immune to theft and fraud.
After all, who else knows and understands their employees best if not for you? In your heart of hearts, you likely believe they would never do something like embezzling money. If anything, you have a rigorous hiring manager who conducts thorough background checks, so, therefore, no potentially malicious individual could be brought on to your team.
Small businesses can be especially devastated by fraud, as these companies often have fewer resources to prevent and recover from malicious acts.
Organizations with less than 100 people often must trust their employees with more information compared to businesses with many more workers with the ability to have anti-fraud controls in place.
While employee fraud prevention may not be top of mind for you, consider that the median loss for small organizations was almost twice as high as those incurred by organizations with more than 100 employees.
The ACFE reports two key reasons why small businesses have an increased risk of employee fraud:
a lack of basic accounting controls
a higher degree of misplaced or assumed trust
In a small to medium-sized business, the employee handling the bookkeeping is most likely to be the one to commit a crime as they can see all of the numbers, and they have your trust. However, in small businesses, there is a 29% chance that the owner or executive is the one who will commit fraud.
How Basic Accounting Controls Can Make A Difference
Often, company leaders believe that spending an excessive amount of money on implementing complex systems of controls will save their company from employee fraud. This is not the case.
Complex controls can surely make a positive impact, but most often, starting with the basics can set you ahead of the curve.
In the ACFE 2018 report, it was noted that internal control weaknesses were responsible for nearly half of all frauds committed. Businesses that had implemented anti-fraud controls had lower losses overall, which means that these controls are working to keep the company safe.
The report also found that when businesses routinely monitor and audit their back-office functions, fraud is reduced. Even with the information found on how these controls can make a difference, only 37 percent of businesses polled had these internal controls in place.
If you would like help implementing internal controls, even at the most basic level, you can reach our team of experts at any time. Our experienced team can make recommendations based on the industry you are in, the size of your company, and the budget you have in place. Protecting your business from fraud is imperative.
What Can You Do To Protect Your Business From Employee Fraud?
Don’t wait for a fraud to occur. It is essential to be proactive and preventative and put processes in place.
Studies show that the more employees believe they will get caught, the less likely they are to commit fraud. Below we have outlined some practical tips for small business owners to reduce the risk of loss due to employee fraud:
Don’t depend solely on external audits: External audits are usually performed once per year and months after the year ends. Even if the audit uncovers fraudulent activity, it may have been occurring for 12 months or longer before being discovered.
Segregate accounting duties: Avoid allowing the accounting function to be controlled by a single individual and segregate accounting duties in key areas instead. Such duties and responsibilities may include:
-Recording and processing transactions
-Sending out invoices
Routinely review financial information: If you have a small team and complete segregation is not possible, the business owner or an outside accounting firm should review the bank statements (preferably online or before the accountant has opened them) and bank reconciliations every month. Vendor payments should also be periodically reviewed. A common scheme is to set up fictitious vendors and manipulate bank statements with photo editing software before printing and filing them for review.
Ensure accounting oversight: Hire an outsourced accounting firm to provide oversight, support, and possibly management of the in-house staff. They will start by reviewing your current accounting controls, workflows, and processes to make recommendations for improvements, implementing best practices, or even take on some of the accounting activities.
Get fraud insurance: Purchase a bond or fraud insurance to protect your business if a theft does occur and/or have trusted employees who handle the finances bonded.
Require your bookkeeper to take a vacation: Embezzlement and other types of fraud require a constant paper trail to go undetected. Therefore, business owners should insist that employees who perform the company’s accounting/bookkeeping duties take a vacation every year and designate a backup person to cover their responsibilities during that leave. Ideally, the vacation should be at least a week-long and occur over a month-end when the books are being closed. Assuming your books are closed monthly, this is not an easy request with a small team and another reason to build a trusted relationship with an outside firm.
According to the ACFE’s 2019 Benchmarking Report, 58% of organizations have inadequate levels of anti-fraud staffing and resources. For your company, this may mean conducting background checks will not be enough to protect your company from in-house fraud.
How Can I Protect My Company?
By partnering with the Signature Analytics team, we can recommend industry-specific suggestions for your company. We help our clients put preventative controls in place and provide an appropriate level of oversight of their financial books and records to ensure accuracy.
Signature Analytics provides small and mid-sized businesses with the resources of a full finance and accounting team. We utilize a fractional accounting model so clients can effectively segregate accounting duties without having to hire additional full-time accounting staff.
This article was originally written on April 8 and portions have been updated on July 7, 2020. The following information is what we know to be accurate, and it is very likely new information will evolve over time as we learn intricate details of this bill. We will continue to update this article as we learn more.
There are some aspects of this bill that will directly affect our customers and their businesses, which we have broken down in detail below.
Direct Payments To Tax Paying Americans
Part of the $2.2 trillion of aid this bill brings includes an estimated $290 billion set aside for payments to the American people. Citizens who pay taxes are reported to receive a direct payment from the U.S. government. The amounts of those direct payments vary based on household size and income level. These figures are represented below:
Single individuals are expected to receive a one-time payment of $1,200
Married couples are expected to receive a one-time payment of $2,400
Families with children under the age of 17 are expected to receive an extra $500 per child.
There are some stipulations for these monetary amounts. Those are for Americans earning more than $75,000 per year, the number of direct payments may be lower. Individuals earning more than $99,000 per year are not eligible for these payments. Another important note is one that affects child support payments. If an individual is behind on child support payments, they will not be eligible for this direct payment.
Small Business Payroll Protection Program
The CARES Act should also help many small companies and 501(c)(3) nonprofits who have suffered from little-to-no business during the COVID-19 pandemic.
Through the Payroll Protection Program (PPP), businesses with less than 500 employees have the ability to secure loans up to 2.5 times the average months of its payroll costs or up to $10,000,000.
If a small business, with employees located in the United States, were to secure this loan, they could use it to help cover some of the following needs:
It should be noted that securing a loan under the PPP can only cover expenses from February 15 to June 30. There is an estimated allocation of $350 billion set aside for loans and emergency grants.
If you think your small business or nonprofit organization could capitalize on this opportunity, call your Small Business Administration lender to begin the process as soon as possible. If you are not sure who your SBA lender is, start by contacting your local banks within your area or try the SBA Eligible Lender locator found here.
It might take some time to organize essential information like tax records and other important documents. The sooner all of these items are organized, the sooner the loan will come through. Be aware the first day to apply for these loans is April 3, 2020.
To help you get started, here are some great resources from the U.S. Treasury office:
For more information and details on the PPP (there are a lot of them), but the above resources can help you get started right away. Continue checking our internal resource center under the “Employer Resources” tab. Additionally, there are many on-demand webinars that can provide additional insight.
the self-employed or businesses that have no employees OR
businesses that did no reduce the salaries or wages of their employee by more than 25%; and did not reduce the number of hours of their employees OR
businesses that experienced reductions in business activity as a result of health directives related to COVID-19 and did no reduce the salaries or wages of their employees by more than 25%.
Also, the payroll calculation used in the loan application still applies to the forgivable amount, meaning the employee compensation eligible for forgiveness is capped at $100,000. However, they are increasing the max forgiveness per employee (non-owners):
Originally $15,384.61 for the eight-week period ($100,000 pro-rated)
It is now $46,153.85 for the 25-week period.
For Owners, Sole Proprietors, Independent Contractors, or General Partners:
For the 8-week period, forgiveness for owner compensation is calculated as 8 / 25 X 2019 compensation, up to a maximum of $15,385 in total for all businesses.
For the 24-week period, the forgiveness calculation is limited to 2.5 months’ worth (2.5 / 12) of 2019 compensation, up to $20,833, also in total for all businesses.
The final day to apply for the PPP loan has been extended to August 8, 2020, allowing eligible small businesses more time to apply for the remaining $130 million of PPP lending capacity.
PPP recipients can apply early for forgiveness? We’ve had many clients ask us whether they can apply for PPP loan forgiveness before their covered period expires. By doing so, they forfeit a safe-harbor provision allowing them to restore salaries or wages by Dec. 31st and avoid reductions in the loan forgiveness they receive. So for now as things are evolving, we say hold off on doing this. Most banks will start accepting loan forgiveness applications in mid-August.
There is still much to learn about relaxing guidelines, we will do our best to keep this updated.
More Time to Spend Loan
One of the most significant changes with the PPP Flexibility Act is now borrowers have more time to spend the amount of their loan. Previously, only eight weeks were allotted to spend this money, which put a considerable amount of pressure on the borrower to ensure the funds were spent on forgivable expenditures. The time frame has been increased to 24 weeks after the origination of the loan or to December 31, 2020, whichever is earlier.
A reduction has been made to the mandatory payroll spending. This means the amount of money from the loan that was required to go toward payroll costs has been reduced from 75% to 60%.
What this change allows is for forgivable non-payroll expenses to be as high as 40%, enabling small business owners to put that money toward other costs they were struggling to pay. For example, for businesses that covered their payroll costs but still didn’t have enough to pay bills like rent, this helps free up some of the money for this purpose.
The repayment period has been extended. Previously, the repayment period was for two years, and now the extension goes to five years while retaining a 1% interest rate. Ultimately, this allows borrowers extra time to pay off the unforgiven portion of their loan.
If a borrower received their loan prior to June 5, 2020, there is a 2-year maturity. If the loan was made after this date, it has a five-year maturity.
One of the other significant aspects of the CARES Act is the tax cuts for businesses. There have been modifications made to the Tax Cuts and Jobs Act (TCJA) of 2017. These modifications directly affect the net operating loss rule, lifting the 80% rule, and ensuring losses are carried back five years.
There is other positive news for businesses and their payroll. A refundable 50 percent payroll tax credit for businesses directly affected by the novel Coronavirus is available to help employee retention.
A few other areas of significance include:
Any distilleries who are helping to create hand sanitizer in their facilities will have federal tax waived
Businesses are able to write off donations of goodwill and student loan payments for their employees
Suspension of penalties for those who must tap into their retirement funds
Every business finds itself in a unique situation during this time; therefore, if you are not already partnered with us, we recommend that you work with a tax CPA or Small Business Administration lender on how to navigate this bill and how it impacts your company.
Signature Analytics is here to support you and can provide references to our partner network upon request. Feel free to contact us to get started.
New Updates For Consideration
It is important to understand the CARES Act is on a “first-come, first-serve” basis, so if your organization needs funding, we urge you to get your paperwork submitted as quickly as possible.
Based on how many employees you have, the limit used when calculating payroll costs is $100,000 and includes insurance, benefits, and taxes.
Eligibility for PPP for self-employed or independent contractors is based on self-employment net income, but cannot be counted for payroll costs.
Any federally illegal businesses will not receive funding and cannot participate in this program.
Nearly $500 Billion More In Aid
As of the evening of April 21, the Senate has approved $484 billion in aid for the stimulus package. On April 23, the bill will go to the House to pass as a complete package and make this funding available.
This additional funding is to support the small businesses, hospitals, and many other businesses negatively impacted by the coronavirus. However, $310 billion of this aid is considered being allocated for the Paycheck Protection Program, $60 billion of which will likely be set aside for smaller lending facilities and credit unions.
Under the emergency Economic Injury Disaster Loan program, there should be roughly $410 billion in grants, $50 billion for disaster recovery loans, and 42.1 billion for salaries and other expenses for the SBA.
Hospitals and health care providers are looking at a likely $75 billion and an additional $25 billion for COVID-19 testing.
All of these amounts are part of what the House will take into consideration later this week.