Reporting, Forecasting, and Risk Mitigation During COVID-19

Taking advantage of federal lending programs and generally managing the financial crisis brought about the by Covid-19 shutdowns requires both careful attention to reporting and cash flow forecasting. Edward Webb, Jill Pappenheimer, and Brett Hazlett of BPM walk through considerations for both managing and forecasting cash flow.

It is easy during times like these for business leaders to feel perplexed. There are so many concerns today around physical and financial safety due to overall insecurity. Rapidly-shifting guidance from regulators and overall economic uncertainty has left business leaders looking for ways to find solutions in a world never experienced before.

However, now is not the time for leaders to leave the future of their business to chance or make decisions based on fear. The businesses that find success during these unprecedented conditions will be the ones that use all of the tools available to them. And that means by staying apprised of the evolving legal and regulatory environment, preparing multiple forecast scenarios, applying best practices, and creating realistic business plans for life beyond the current crisis, organizations give themselves the best chance of emerging from Covid-19 as healthy and sustainable companies.

Government Stimulus Program Impacts

After fast initial uptake by businesses of the Paycheck Protection Program, Congress made available a second tranche of funding on April 24, and it has been accessed at a much slower pace. As of June 3, only a little over 50% of the additional $310B has been approved by the Small Business Administration, leaving almost $150 billion remaining unallocated. This pace is almost certainly due to the constantly evolving rules for the PPP loans, which have made businesses wary of applying for loans and running afoul of the program rules.

Additionally, on June 3, the Senate passed the Paycheck Protection Program Flexibility Act, which is now just awaiting the President’s signature. Among the changes are an increase to the covered period from eight weeks to 24 weeks, more flexibility for businesses that were unable to rehire employees or return to previous levels of activity due to compliance with new safety requirements, and reducing the ratio of funds that must go towards payroll from 75% to 60%.

Now, significant attention will turn to what businesses must do to ensure their loans are forgiven. With the changes approved by Congress, the SBA will need time to reinterpret its Loan Forgiveness Application. As currently outlined, the reporting requirements place a large burden on borrowers in calculating their loan forgiveness amount.

While awaiting the updated guidance from the SBA, our advice to businesses hoping to have their loans forgiven is to focus on documentation. Clearly this is focused on forgiveness (e.g., invoices, receipts, canceled checks, etc.), but borrowers should also ensure they have fully documented other aspects of the program, such as their calculations for their original loan application and their case for meeting the loan request need certification. To expedite that process, businesses should act now to develop a streamlined system for digitally saving and cataloguing these documents.

On a related note, business leaders should also be aware of the potential risk of additional oversight. For instance, in May, the SEC launched an enforcement probe focusing on public corporations that received loans under PPP, and the SBA has indicated it plans to review all loans larger than $2 million. For these businesses, enforcement will likely consider disclosures companies made regarding Covid-19’s impact on their business and financial position to determine if the loan was truly necessary. Documentation that clearly identifies and demonstrates these impacts will be critical to addressing questions raised during an SBA review.

Cash Flow Forecasting

While the pandemic was obviously the catalyst for today’s economic uncertainty, it did not occur in a vacuum, nor has it been resolved by government programs. Pre-coronavirus, 10,000 baby boomers turned 65 each day, and many began retiring. This group owns over four million small businesses in the U.S. With over $2 trillion in funds available for private equity transactions, we had an active and prosperous market.

But Covid-19 and associated shelter-in-place orders have impacted the potential sellers of small businesses enormously. Sellers are now challenged by immediate term liquidity, ongoing profitability and the viability of their business model. Likely buyers are now reluctant to accept the risk associated with a small business acquisition; they are waiting for the dust to settle to see how deeply any recession may go.

As a result, private business owners may be seeking to move to another phase of life at just the wrong time. Business leaders intending to sell during this period will need to deliver consistent, reliable information. Whether they are lenders, investors, or buyers, stakeholders all demand accurate and timely accounting and financial information. Cash flow forecasting is how you tell the story.

Preparing a cash flow forecast begins with historical information, which provides the data necessary to understand how financial performance and position have worked together and provide an understanding of the inter-relationships between accounts which is essential for making a cash flow forecast. For instance, historical profit margins provide a basis for estimating future operating profitability. Likewise, collection and payable history permits estimates of future sources and uses of cash.

Cash flow forecasting also requires estimates of future performance—both company-specific, and of the broader economy. When coupled with a firm understanding of historical relationships from the company’s financial data, these estimates take the shape of a forecast iteration which also incorporate expected changes in operations.

The goal of cash flow forecasting is to permit sound decision making. In practice, decisions usually rely on a range of likely scenarios, developed as a function of the many variables influencing outcomes. Cash flow models allow for modifying inputs or assumptions based on different expected economic factors or levels of performance. Modifications can provide alternate views of the future and help users draw more educated conclusions. This type of sensitivity analysis is particularly vital during times of economic volatility and stress.

For lenders and investors, a cash flow forecast which is developed with sensitivity to expected levels of performance and the variability of inputs serves as kind of an insurance policy against catastrophic oversight. Preferably these analyses are objective, and they are often prepared by third-party experts. Smart business owners are wise to recognize and embrace the central role that cash flow forecasting can play in reducing uncertainty and achieving their business objectives.

Addressing Fluctuations With People

Managing people and addressing core needs of employees becomes even more challenging and important during tumultuous times. There are many areas business leaders must be mindful of to make it through this pandemic and future economic shifts. This constant motion in uncertain times requires businesses to be resilient, compassionate, flexible, and agile. To do this the entire workforce needs to come together, collaborate, and align to the new way forward like never before.

As employers, recognizing the fact people are challenged emotionally, physically, and mentally will make the difference in employee’s commitment to the organization. Business leaders will find a powerful engine with their employees committed to the fluctuating path forward. When there is the ability to successfully align employee’s responsibilities to changing initiatives and therefore priorities, businesses have a competitive edge that supports the ability to stay in the game and thrive.

From a tactical perspective, reducing headcount and therefore payroll may be the first level of defense, and maybe critical in the short term. But given the huge impact on people, businesses should avoid this decision if at all possible. If cash flow is not sufficient, and the necessity to cut payroll is required, business leaders should consider conducting layoffs, furlough, or reduction in hours. Layoffs are the more permanent option of the three.

When considering cutting staff position during a pandemic, furloughs may be a better option than layoffs. Furloughs make it easier to get back to normal operations quicker, if staff are on standby. And, unlike layoffs, furloughs actually reduce labor costs immediately, without adding new costs resulting from severance packages and cash payouts. That can be a major benefit to companies facing cash-flow shortages.

The other options typically used to avoid layoffs are to reduce employee hours or institute pay cuts. But tread carefully here: while employers may (depending on regulations in that state) have the ability to reduce scheduled hours for hourly employees, the story is a little more complicated for salaried employees. Employers cannot reduce weekly hours for employees, without risking their exempt status.

What employers can do is have exempt employees work fewer pay periods. Employers are allowed to make a “bona fide” reduction of an exempt employee’s salary “during a business or economic slowdown“ as long as that a reduction is not related to the ”quantity or quality of work performed.”

Companies should ensure their selection process operates on solid, defensible grounds—preferably aligning layoff criteria with the company’s goals and vision over arbitrary criteria like last-in, first-out—to avoid actual or perceived discrimination. It is important to understand that even the most rigorous selection process can still be subject to implicit biases or other perceived biases. Company leaders should have any list be carefully reviewed for evidence of disparate impact on employees who fall in one or more protected classes.

There are many areas business leaders must be mindful about to make it through this pandemic and future economic shifts, and these are just a few thoughts. Whether the decision is to focus on that collaborative, agile team, or reduce headcount, remember to stay current, be innovative, and most importantly stay healthy while navigating within this new, unchartered environment.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Contact us to learn more.