Expertise Beyond the Numbers

Managing Cash Flow Through a Crisis [On-Demand Webinar]

Whether your business is investor funded and/or grant backed, investors are ALWAYS looking for companies that are pre-revenue or cash flow negative to extend their runway and slow their burn rate — especially in uncertain times.

SC&H Group hosted a webinar on Wednesday, July 1, to help businesses with guidance on how to slow down cash burn, how to categorize your expenses, how to use your cash flow statement as a good decision-making tool, and how to leverage business loans (including the PPP), grants, and payroll tax deferrals/credits to your advantage.

It is important to note that this information is very fluid. The content and advice we are presenting in the video is our interpretation of what is available at the moment – and all businesses need to continue working closely with their bank, attorney, and accountants.

For a downloadable version of the presentation slides, please visit this link.

We’ll continue to keep an eye on new information and add new content as it becomes available. In the meantime, if you have any questions for the SC&H Group Team, please reach out to us directly through our website.

Video Transcript

Pam Chelden: Good morning. Thanks for joining us today. I lead the Accounting Solutions practice here at SC&H where we have a team of CPAs and experienced bookkeepers providing outsourced CFO, controller and bookkeeper level services for small to mid-sized companies, usually at a fraction of the cost of hiring those positions full time. We use all cloud-based technologies enabling efficient handling of our clients accounting processes. A little bit about my background. I started my career with KPMG in North Carolina and I’ve been a CFO for the past 20 years, working for small to mid-sized companies, both independently owned and private equity owned in the logistics space and the Ed Tech space, I’ve sat through countless board meetings and discussed cash flow forecasts at length. I’m excited to talk with you today about cash flow. It’s one of my favorite topics. Every business is different and in a different cash position. I hope that you can take away a few nuggets of info that helps you navigate through our current climate. This just summarizes our accounting solutions practice that I covered recently. Here’s the agenda for today. The importance of good data, burn rate, cash flow, managing costs, navigating the PPP, and some grants.

Let’s get started with the importance of good data. So, I’m going to talk about “cash is king”, a wise man once told me this and then I’ve never really appreciated it until I had no cash. And then I realized that if you have cash, you get to make decisions and if you don’t, then you’re at the mercy of someone else. I highly encourage you to think about the “cash is king” philosophy and make decisions based on that. Let’s talk about cash flow. Cash flow is the difference between your cash flow coming in and your cash flow going out. Cash collected from customers is a source of cash flow coming in, grants, investor funds, sale of equipment and tax refunds. Some examples of cash flow going out is your payroll, rent, vendors, equipment, inventory, interest and maybe some other purchases. If your cash going out is greater than your cash coming in, then you’re burning cash. Let’s talk a little bit about your cash burn rate. It’s the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations. It’s a measure of your negative cash flow, and it’s typically discussed in terms of a monthly burn rate. This is the focus for new companies and startups, because if you have overhead and you may be pre- revenue, you’re going to be burning money. It’s a hot topic for investors and they want to know how fast you’re going to burn through their money. Investors want to see that you understand this. So, you need to ensure that you can discuss it easily and that you kind of have that information at your fingertips. It shows that you own it and it shows that you’re focused on it and that you care about it.

Tied with your burn rate is your runway. And this is the amount of time the company has before it runs out of money. So, for example, let’s say you had $600,000 in the bank and your burn rate is $100,000 a month. Then you have about 6 months of a runway before you run out. If you’re beyond like 3 years, I think you’re good and you don’t need to focus on it every day. Anything less than 2 to 3 years of a runway, you need to plan to address what’s going to happen at the end of the runway. At the end of the runway, you need a trigger event. So, either you’re going to have customers and enough revenue to cover your overhead or you’re going to need to raise another round. Some investors might put Milestone’s in place to receive the next round. Your goal here is to slow the burn and extend your runway. If you look at our earlier example, if you’re able to slow your monthly burn rate from $100,000 down to $50,000, then your runway increases from 6 months to 12 months. And you can see just having that additional time horizon gives you more options in running your business and getting it off the ground. Your goal is to achieve liftoff, right? Your goal is to get customers generating some revenue to help cover your costs.

An important data point is your historical cash flow. It’s a really good starting point. You need to have a good understanding of what you have historically spent. Look at the rear-view mirror and see what you’ve spent. You need to look at your past 6 to 18 months to kind of get a good trend of what have you been spending money on. You need to identify any unusual activity and kind of pull that out. Once you kind of understand the historical view, then you can start to project the future. So, the first thing you need to do is determine your cadence. Do you want to project it daily, a weekly basis or a monthly basis? Your runway is going to determine that. If your runway is like 2 months or less, you need to be looking at a weekly cash flow forecast to understand exactly when you’re going to run out of money. If you’re looking at a 6-month horizon, then you’re probably going to be looking at it maybe weekly. And if you were 6 months or beyond, then you can look at a monthly cash flow forecast. You need a reliable method to project, and so that’s why I wanted to start with your historical data and your trended data. That’s a good basis. Then you need to add your future projections and any growth factors, anything unusual that you know about, the numbers that you put in your forecasting to match your story. If you’re telling investors that you plan to have revenue in 6 months, then your cash flow forecast needs to match that. Doesn’t have to be exact and I’ll talk about this a little bit later. Your revenue forecasts tend to be optimistic. So, for your cash flow forecast, you might just want to put a factor on that and bring those numbers down just a little bit. You want to make sure that you provide room for error, for unknown circumstances and play the “what if” game. What if in January somebody had said, how would a worldwide pandemic impact your forecast, you’d be a hero right now. I don’t think anybody has that crystal ball. But make sure you play the “what if” game if you know that you’re a person that wears kind of rosy glasses and you look optimistic. Find somebody who isn’t so rosy and play the “what if” game with them. It’ll really help you build in the cushion that you need for your cash flow forecast, because the last thing you want to happen is to run out of runway. If you say you’ve got 6 months of a runway, you need to have 6 months of a runway. Nothing is worse than something coming up and you only have 4 months of runway. You’re going to be scrambling.

Let’s talk a little bit about how to manage our costs and how to control them. Your cash flow, we talked about it’s a measure of your cash coming in and your cash that went out. So, we want to speed up our cash flow coming in and we want to slow down our cash flow going out. Sounds simple, right? And it is. But the devil’s in the details and I’m going to get into some details here and you must focus on it. Someone in your organization needs to focus on it because you can easily lose sight of it if the entire team is focused on product development or sales or strategy building. You need somebody who’s looking at it with you, whether it’s your accountant or somebody else, and just make sure that you look at every decision through the cash prism. So, let’s talk about ways that we can kind of speed up our cash flow coming in. If you have revenue from customers, you can consider offering discounts for early payments or bulk purchases. Try to get payment upfront, collect before shipment or before service delivery. Align your business processes and customer agreements around the “cash is king” philosophy. If you’re pre-revenue, then consider structuring your customer cycle for cash collection upfront. The sooner you train your customers on your expectations, the easier it will be to get a cash collection upfront. Work with your bank, see if you qualify for an SBA loan. Look at equipment financing. Make sure that you’re aligned with a bank that matches your business model. If you’re a young and nimble company, look for a bank that matches that philosophy. There’s a lot of banks out there that work with venture backed businesses that maybe traditional banks would not provide credit to. And then kind of last resort would be your investors. Can they fund earlier than expected? Can they give you more than expected? It’s worth pursuing, right. You might not be able to do that, but it’s definitely a source of cash.

Next, let’s look at cash flow going out and ways to control that. I separate cash flow going out into two categories, fixed and variable. And I’m not using it in the typical cost accounting framework that you usually understand with fixed versus variable. To me, fixed is the non-controllable, whereas variable is your controllable. So, let’s talk about that a little bit. Your payroll costs are fixed. Once you hire somebody and you’ve got a payroll cycle that’s every two weeks or once a month, you want to make sure that you have enough cash to fund that right. You can’t say, oh, yeah, we can’t make payroll, we’ll pay you next month. That just doesn’t work. It’s kind of a non-controllable fixed cost. Same with benefits. Once you lock in and you’re providing health benefits, you need to pay your health insurance provider every 30 days or they’re going to cut off your benefits. For your rent, the landlord’s going to enact some heavy late fees if you don’t pay on time. For your utilities, they’ll just cut you off so, again, you need to pay them. For employee reimbursement, once you set your payment cycle, they’re going to expect to be paid on a regular basis. Business insurance is another one that’s critical for the business and not one that you can usually push out. If you try to push it out, they’ll turn off your insurance and then you have a gap in coverage, and you have to get it restored. It’s a little bit of a headache. From experience, I know that’s not one you can really push. Some controllable costs are more your non-critical vendors, maybe consultants, attorneys. You might be able to push your payments out 90 days. Just a quick comment on pushing out 90 plus days. It could impact your credit. Maybe you care about that. Maybe you don’t. You’re also going to see a buildup in accounts payable on your balance sheet. If you’re somebody that that bothers you, then you might not want to push as much as you can. If it doesn’t bother you, great. It’s really kind of our personal preference. But know that you still have that liability to those vendors who use that service. To me, it’s a great way to turn your vendors into creditors.

Now I’m going to talk a little bit about the fixed non controllable cost and ways that we can move them on that spectrum to where they’re a little more controllable. You’re still going to have that fixed payment cycle, but maybe we can reduce the cost that we’re incurring here. Those are things that I want to cover today. One of the biggest items is payroll for most companies. I wanted to spend a little bit of time talking about payroll because it’s usually your largest expenditure. One thing to consider is layoffs. That’s difficult to do, but if you’re in a cash strapped situation, you certainly need to take a look at that and consider layoffs. You can consider some part time work or work share arrangements. You can control the overtime. You can say overtime is not approved unless it’s by the executive of the of the business. Use of independent contractors or temp staffing is also a good way because independent contractors, you can turn them on and off. It’s a lot easier to turn that switch than it is with full time employees or part time employees. You’ve got more of a commitment there. If you’re starting to hire employees, these are things you want to consider. Can you start with independent contractors or can you start with part time or work share arrangements? It’s just something to consider. You want to identify your critical employees and make sure that they understand that they’re safe, that they understand why you’re having to make these cash flow decisions. You want to make sure that they stick with you because this will create an unstable work environment and you don’t want to lose your good employees. Some other things to consider is some deferred comp arrangements, maybe at the executive level they’re willing to take no salary or a lower than market rate salary in exchange for equity or stock options. That’s a good way to defer your cash flow there. And again, just make sure you understand the impact to your employees. For payroll tax, always remit your payroll taxes on time. Don’t mess with it. You don’t want to land in jail. A little bit later in the webinar we’re going to talk about how to take advantage of some payroll tax credits and deferrals that are available right now that are completely legit. Stay tuned for that.

The other area that goes with payroll is your benefits. This is an area that there’s a lot of room to really control your costs and make sure that you only provide benefits on a basis that matches your cash flow. Health insurance is common that when you hire somebody, they expect to be offered a health insurance plan. I really encourage you to work with a health insurance broker who can advise you how to structure a good plan for your employees with minimal cost to the company. There are a hundred different ways to provide and you can provide a good plan and most of the cost is borne by the employees instead of the company. It’s something that you can share with your employees, that you’ll improve the benefits over time as you get to cash flow profitability. I really encourage you to work with a health insurance broker. They are paid by the insurance companies, so it’s no cost to you. They can be really creative. I’ve had a lot of success working with some really good health insurance brokers. The one that goes right with that is what I’ll call voluntary benefits, it’s dental, it’s vision, short-term disability, and long-term disabilities. Those you can offer them, but they don’t need to be company pay. They can be entirely employee paid. At least you’re offering the benefit. You have the option to buy health, dental insurance and vision insurance and short-term disability. Bonus plans are another one that you can structure the payment schedule. I encourage you if you can, I wouldn’t have bonus payments due if you’re not cash flow positive. You might have to do that in order to retain some top executives, but I would certainly make them annual payments versus quarterly or monthly payments. Commission plans is another one that you can design this so that you can structure your payments. You certainly should use the “cash is king” philosophy here and do not pay commissions until your customers pay you. That’s a good “cash is king” philosophy there. You can also structure it so that maybe they’re only paid on an annual basis or maybe quarterly. The more that you can stretch that out, the more it’s going to help you with your runway. 401K plans are another one that you can offer a plan to your employees, but you don’t have to match it. It’s a no cost benefit option, which is fantastic when you are burning through cash. I would highly encourage you to not add a match component until you are cash flow positive. You can always add benefits later. And that’s my key reminder here, it’s always easier to add or increase your benefits once you are cash flow positive than it is to eliminate or reduce a benefit once it’s already been granted. I’ve unfortunately experienced having to do that multiple times. It’s really demoralizing to the workforce to have a benefit taken away. So just be judicious before you offer those benefits.

Next, I’m going to slide and talk a little bit about vendors and how we can kind of manage to control some of the fixed costs that we’ve got coming out of our cash flow. My hot button here is ask, right. Always ask. Always ask for extended payment terms. It doesn’t hurt to ask. You’ll find out that some vendors will have flexibility with their cash flow. Not all. Some vendors might be in the same boat that you’re in and they need cash up front. But a lot of vendors might not be supercritical and they might be willing in order to lock you in to maybe a longer term commitment, to give you extended payment terms, which will help you with your cash flow management. I highly encourage you to negotiate the timing of payments with your vendor.

Let’s talk about rent. If you’re in an incubator space, that’s awesome. Stick with it if you possibly can. If you are currently renting space, consider the need for that, especially during this time. I think a lot of businesses are figuring out that their employees can work remotely, and they don’t need to pay for rent. It’s a very expensive overhead cost. But you might already be in a rent space. You might have twice as much space now as what you need. I would seriously consider downsizing. Understand the terms of your lease agreement and when it renews. Many do require a notice period and if you don’t give them that notice period, it will automatically renew. Just make sure you grab that lease and look at it. You can consider subleasing. It might be a tough market right now to sublease but this is where a good commercial real estate broker can help you. They are worth their weight in gold if you need to manage your rent space. Business insurance is another one of those fixed costs, but it’s critical. You need to have business insurance, but there’s a lot of room to look at your coverage options. So, again, if you have a good business insurance agent, they can help you explore the options that are available to you. They can explain what’s common for your size business and in your industry and make recommendations there. A lot of times, you could consider increasing your deductible, which will reduce your premiums. And then most business insurance plans will offer extended payment terms. I highly advise you take advantage of that if you’re in a cash flow situation.

For utilities, I don’t have much to offer there. There’s usually very little flexibility and they’re critical. You don’t want the lights to be turned off in your building, so you need to pay your electric bill. For your internet service provider, there’s usually not a lot of room to negotiate there. They’re going to want their payment. Trust me, I know. We didn’t pay our internet provider and they cut off our internet service and that’s usually critical to any business. So those, usually they’re on the smaller side of your expenses, just make sure you pay those timely. Then you’ve got vendors that you purchase equipment and inventory for. These are going to be on your balance sheet. So, they’re not showing up in your income statement, but it’s still cash flow going out. For equipment purchases, look to finance it through your bank or other sources, vendor financing, negotiate extended payment plans, even your smaller equipment like laptops, monitors, and office furniture. A couple of years ago, I found a great deal with Dell. Instead of spending $1,500 to $2,000 to buy a laptop for all of your employees, they had a monthly plan where you could pay, I think it was $50 a month for 3 years and at the end of 3 years they’d give you a new laptop. So that’s a fantastic way to extend your cash flow and extend your runway. Just defer it as much as you can.

On the inventory side, if your business requires inventory and that’s not your core competency, I would really encourage you to outsource your inventory. I’ve worked with a company that when I joined them, they had probably 5 years’ worth of inventory on hand. Over a 12 to 18-month period we got it down to a just in time inventory. It takes a lot of focus and attention to understand lead times, minimum order quantities, you know, your forecasting. There’s a little bit of a science to that. But it can certainly save you a lot of cash if you can get somebody else to maintain your inventory and control that and manage it and you just pay as you need it. That’s certainly the most efficient way to go about doing that. Some other expenses that you can look to control is employee reimbursement. Make sure you have a good expense reimbursement policy. That’s really important. If you have one, look at it, can you tighten it up? Limit the amount of your meal reimbursement, your hotel, your airfare. Keep this in mind, especially if you’re a young company. Maybe it’s just you and a couple of other employees, and you might think, oh, everybody here is using good judgment on what they should spend. But as you grow and as you add employees, you might end up hiring somebody who’s worked for a very large company and they’re used to having a large expense reimbursement budget. So, it’s a good idea to go ahead and put policies in place because somebody might come on board and they’re used to being able to fly first class when they fly overseas. Well, you don’t want to be on the hook for a $10,000 airfare. So just make sure you put restrictions in there. You can always grant exceptions to it but start with a policy that really caps that. It’s a good practice to get into early on.

Bank fees are another one that you can look at. What are you paying for? Is it all necessary? You can ask for treasury management review of your account with your banker and I encourage you to do that. It’s interesting to learn. They’ve got lots of bells and whistles there and ways to protect your money. Just make sure that it’s all necessary and that you’re OK with the costs that you’re paying for. For technology services, cloud-based hosted environments are more cash flow favorable than having an in-house server room with a dedicated temperature-controlled room with servers that are very expensive. Cloud-based hosted environments are kind of the way to go. Our entire team is working on cloud-based technologies and when we had to start working remotely, we didn’t miss a beat. I highly encourage you to consider using cloud-based hosted environments for your business. For copiers and scanners, if you’re in an office, everybody doesn’t need a printer in their office. You can get one that everybody can use. Just don’t over commit there. They’re hard to get out of the leases.

Let’s take a look at the spending approval policy. Who can authorize spend within your company? Be aware of that and understand that, because once you’ve committed, it’s really hard to adjust the payments. It’s hard to come in later and go, oh, we want to pay over 12 months. Can you give us extended payment terms? You just want to make sure that whoever is committing the company to that spend understands your cash flow management strategy. You need to balance authority and empowerment with cash management. If your authority and empowerment comes more when you’re cash flow positive and then you want to start to delegate some of those spending limits and authorities, I’d be really hard pressed if you’re in a cash burn situation to delegate too much of that. You can also set approval limits and tie it to budget, but I just caution you to be careful with spending based on a budget, because budgets need to live and breathe. They are going to change. Circumstances change and just because you had an initial approval to spend $100,000 on a piece of equipment when the budget was prepared, 3 months later, situations may have changed, and you might not have the cash flow for that. So just make sure that your management team or whoever is making decisions on that gets an up to date budget and understands where you are.

We’ve talked a little bit about how to speed cash flow up and how to get payment up front for your customers. We’ve talked a lot about how to slow it down, how to push cash out and so now I want to talk a little bit about how to prepare a cash flow forecast. This is your typical accountant statement of cash flow, right. You’ve got your cash flow from operations, investing and financing here. This is what auditors prepare. This is what the banks expect. It’s usually part of your monthly financial statement reporting package and it serves that aspect well but it’s not a great management tool. I don’t like to use this in order to really understand my cash flow. You need to lay out the basics. What’s your cash flow coming in? What’s your cash flow going out? If you look at this cash flow statement here and it’s just a sample one, I can’t see how much I spent on payroll or rent last month. And so, it just is not useful as far as a management tool.

This is a sample cash flow management tool that I’ve created in the past and I just want to share this with you. Don’t worry about the numbers. I’m going to walk you through the framework of this. It’s a simple Excel spreadsheet. Let me just point out a couple of things here. Up here at the top, you’re going to have your deposits that are coming in here. You’ve got payments going out right here. And then you’ve got the financing section down here. You’ve got your beginning cash and you’ve got your ending cash. And the cash at the end of the day needs to match what’s in your bank account. That is your source of truth. So, let’s do a deeper dive into your cash in. What are your primary sources of cash here? And for every business it’s going to be different. I encourage you to pick 5 or 6 main sources of cash that might be a big customer. A couple of big customers that once they make that payment, man, that’s a significant cash inflow for you. You might want to tie your cash inflow to your revenue forecast, right. If you know and if you can expect, based on your historical trend that your customers typically pay you in 30 days or 60 days, you can take your revenue forecast, push it by 30 or 60 days and plop it into your cash inflow forecast. Be careful with your revenue forecasts. They tend to be stretch goals. I’d encourage you to put a factor on that if you’re going to plop it over into your cash flow forecast. Put a 75% factor on it or something like that. Also, if you have deferred revenue, if you do subscription billing for the year and they pay in advance upfront, which is great for cash flow, just make sure that you don’t pick up your deferred revenue as part of your cash flow, right. You want to know bookings and you want to know once you book it, how long before the customer pays it and then you can build that into your cash flow forecast. Just make sure you understand the differences there.

Now let’s take a look at our payments and our cash going out. I like to put my fixed costs up top because I know that’s money that’s going out and I put the variable or stuff that I might be able to push out to 90 days near the bottom. I know my main fixed cost is payroll and that’s going to go out every two weeks or twice a month. If I’ve got a credit card, usually the credit card company comes in and swipes that money right out of your bank account. Your benefits and your sales commissions go in there. Then I have a category here for just fixed vendor checks. Your rent, your utilities, your business insurance, that goes in there. If you want to break it out separately, you can. Again, there’s no right or wrong here. There’s no black or white. It’s just whatever makes sense for your business. What are the primary categories of expenses that you want to track and understand? Down here in variables where I might put some of my larger vendors, if I’ve got a vendor that’s giving me an extended payment term and I want to make sure that I match those extended payment terms and get that in there, I want to lay that out so that I understand what the cash commitment is. And then the financing section here is going to be, you might be getting money in from your bank, you might have set repayment terms to your bank, you might be selling a business line or selling some equipment, you might be getting some investor in or investor funds, and then you’ve got maybe attorney fees or investment banker fees that go with that. That goes down below.

The two top sections up here are going to be your operating cash flow, and that’s going to be how you calculate your burn rate. But these other items down here in financing obviously impact your bank account balance, so you need to understand those and factor those in as well. Some key features for the cash flow management tool that I want to point out here are that you’ve got monthly trends up here. We’ve got month by month. We’ve got actual versus forecast. You can see January through May is actual and then July through December is our forecast. The cash down here ties to the bank balance. We’ve got total deposits and total payments and the difference between those is your cash burn or your cash flow positive. I set this schedule to auto format, so when it’s negative it highlights it yellow. It’s a model that we can play with. Anything in the forecasting columns, I could come in here with the president or with other members of the management team and say, well, what if this customer paid us sooner? How would that impact our cash flow? What if we delayed this purchase? What if I pushed this vendor off? How does that impact my cash flow? I love playing with it, it’s a cool model. It’s something that your whole management team should really understand. And it’s something that you can also share with your investors as a demonstration of understanding your cash flow and the ins and the outs and how you plan the management and how you plan to extend your runway.

In this example we’re looking at, June is where we are and you can see we run out of money in August. So, you’ve got a 2-month runway. I really should be looking at this daily or weekly. And I did have a weekly forecast as well that I was running with this so that we would really understand when we were going to run out of money. Your accountant or your FP&A person should be able to help you with this. It does require some analytical thinking and forecasting so, make sure they’ve got that skill set, and they’re comfortable with the forecasting model. We’re happy to help you set this up and then you can run it yourself. I’ve done this exact same tool for one of my clients here at SC&H. I set it up for them, ran it for a month or two, and now they’re inputting the data and running it themselves. It’s a great tool. I understand what it’s like to not be able to sleep at night because you don’t know if you have enough to make payroll. It’s a scary situation. Being able to lay out the numbers and know the exact time of that helps you a little bit with sleeping at night. I speak from a lot of experience there.

Some cash flow and some final thoughts is “cash is king”. Just please remember that. Live and breathe that philosophy. I certainly have learned that lesson well and understand how important that is. Be conservative, nothing’s worse than running out of runway. Make sure that you’ve got enough runway. And then just make sure you build in some room for the unknown. All right. Hopefully, you have a couple takeaways from this part of the webinar. I would now like to turn it over to Leanna, who is going to walk you through the PPP and the CARES Act and the grant reporting.

Leanna Steele: Well, welcome everyone and I’m excited about walking you guys through some of this. I know the PPP and CARES Act have been a huge topic of discussion for everyone over the past few months. And I think everyone has been happy to participate in those. If you haven’t looked into applying for a PPP, we have great news. It looks like they’re going to be extending the deadline for the application. The Senate has approved the extension for new applications. It’s going to be going to the House and then it’ll have to go to Trump. But they are expecting it to be extended for new applications through August 8th. If you’re not familiar with the Paycheck Protection Program, here’s a really quick rundown. It’s a forgivable loan that the government is offering through the Small Business Administration program. You apply through your bank and it’s based on two and a half months of payroll. There’s a ton of blogs on our SC&H website about it. If you haven’t considered applying before, it might be time to think about that. I think the government has demonstrated that they’re willing to assist with this cash flow in that Pam has been talking about. And I know all your customers, everyone is tight on funds. So, getting cash from the government could be a really good way of bringing more cash into your companies.

I know everyone has been extremely interested in the forgiveness rules. They have continued to give us new information about that constantly. But if you haven’t heard yet, they have extended the 8-week period to a 24-week period. You now have 24 weeks to spend your PPP loan on allowable expenses, you know, payroll, rent, and those other items that they’re allowing. And a lot of people are asking questions, what’s allowable and what’s the best way of tracking it. There are several blogs on our SC&H web page explaining all those things, as well as the SBA website. Then again, even if part of your PPP loan is not forgiven, it’s at a 1% interest rate for 5 years. You can’t get a loan from anyone else at that rate. It’s a fantastic method of financing. Honestly, inflation will probably surpass one percent. So, it’s good to consider when you’re repaying it as 2020 ends. How long do you want to spread out the repayment? And I know everyone will be probably recovering from this pandemic and financial stress from all of this for the next few years. I know probably a lot of people are thinking, well, it’s not that much money, we only owe $50,000 or $100,000, that wasn’t forgiven. But consider whether it’ll be right for you guys to spread it out over the next five years. You want to talk to your bank now and make sure that you have a payment schedule planned and you know when they’re expecting you to repay the loan with them so that the loan repayment process will go through your bank, not the SBA.

Also really important to keep in mind, especially as the second quarter has just ended, if you’re not familiar with the FFCRA credits, these are for any employee who is not able to work because they’re either sick with Coronavirus or if they’re at home taking care of their children because their school or daycare for their children is closed or if you’ve been forced to quarantine for whatever reason, whether it’s a state or federal rule that everyone has to stay home. And a lot of people have asked whether you must do consecutive weeks or if you must take a full week. So, my husband and I have both been home taking care of our kids and it does not have to be that one of us is using the FFCRA credit and the other is not. You guys, you can divide your time. So, again, if you have not considered this credit, the reporting will be on 941, which is due in July. And it is meant to be used first before applying the payroll protection, PPP, so use the FFCRA credit before using the PPP funds. If that makes sense. This can be used in addition to the PPP and should be used first. What will usually happen is you will get a refund from the IRS or in other circumstances they’ll roll the credit forward to future months to apply against your employer tax credit. This would be for two weeks, if you are sick with Coronavirus or any employee is sick with Coronavirus unable to work. There’s two weeks for that. It is $511 per day. And then if you are also home taking care of your children, there can be an additional 10 weeks. So, 400 hours of coverage is at $200 per day. And then you want to track this and document why people are needing to use the FFCRA credit and whether they were able to telework and all those kinds of rules. So maybe do a little research, read a blog, and make sure, I know there’s a lot of information on the Department of Labor website for who is eligible and how to apply. And check the IRS website and SC&H blogs to see how to apply it and who is eligible.

In addition to the FFCRA, there are other tax credit programs. The Employee Retention Credit is if you haven’t used the PPP. You can apply for this if you’ve had a 50% reduction in revenue compared to prior quarters or if you were partially or fully shut down due to the pandemic. It’s a $5,000 credit per employee. There’s a calculation that will be done, but it’s up to $5,000 per employee. And you would file this with your quarterly taxes on your 941 that is due in July. This is through the end of 2020 as well. If you weren’t that affected in the second quarter or if you’re affected in the third quarter, you apply then. Again, this employee retention credit is not in addition to the PPP, it’s an either-or process, although it is allowable with FFCRA credits which are separate from the PPP. In addition to those credits, the payroll tax deferral process is allowable with any of the previously mentioned. If you are using the PPP, you’re eligible for the payroll tax deferral or if you’re using the FFCRA credits, you’re still eligible. And what this does is it defers payment of employer taxes. It’s not forgiveness, but it does defer them and will not be due until the end of next year. So, 50% at the end of 2021 and 50% at the end of 2022. This is a no interest loan essentially from the government, which, you know, if you consider that payroll taxes are usually around 7% or 8% per employee on all salaries and wages, this could end up being a pretty considerable amount of money. There is a new line on the 941, as mentioned earlier it’s line 11. But if you haven’t spoken with your payroll provider about this yet, definitely speak to them. They should be able to set it up for you and assist you with tracking it, for the payroll tax deferral.

If you have not already been doing this, if you have inventory and sales and you collect sales tax, this is a basic one. If you’re not remitting it on time by the 20th or the following month, you should begin doing that. They give you a discount. You get to keep a portion of the sales tax that you collected. Obviously, for a lot of people, their sales are down but if you are still making sales and you haven’t been taking advantage of the Sales Tax Credit, you definitely want to begin doing that. There are some other tax credits as well. If you perform research and development and you aren’t selling your product, you would be eligible for the Research and Development Tax Credit. This is a credit that you can either apply against income taxes or as is the case in a lot of research and development firms, you may wish to apply this to your payroll tax credit. I know that there are quite a number of other payroll tax credits available right now, but if you haven’t applied your R&D tax credit to payroll, you can apply this for years that have already passed. So, if you have an R&D credit from 2017, 2018, you can refile your 941s and get that cash. I know we recovered $100,000 earlier this year for a client, so that was a huge cash inflow for them. You would want to look at your corporate income tax returns and see if you have a research and development credit that’s just sitting there waiting for you guys to have net income and owe taxes. So, consider that one.

Another source of government income is through grants. And there are a ton of grants out there. Check out the SBA website. There’s a listing of all different kinds. I know a lot of our clients use the Small Business Innovation Research credit, so the SBIR credit, as well as the Small Business Technology Transfer credit, so that’s the STTR credit. These are for businesses who are doing a lot of research and they will cover your payroll costs and literally millions of dollars available in grants there. If you haven’t looked into any grants yet and you think it’s possible that you’re eligible, there are a ton for women led businesses, nonprofits, there are quite a few of those and, don’t forget when looking at government grants to check your state as well. In Maryland, I know yesterday they just announced another couple hundred million dollars in grant funding for small businesses and nonprofits. So, check your states and make sure that you’re not missing out on any state grants that are available to you. I know the Maryland grants that they just made available are like a $10,000 grant for each small business and that’s going to be available on July 20th. That’s brand new as of yesterday. Additionally, I know Pam was speaking about whether you may be able to land some investment funding right now. And in Maryland, specifically, if you are doing biotech, which a lot of our clients do, this investment incentive tax credit for Maryland could be the icing on the cake for your investors if they’ve been hesitant, as I know many have right now. If you’re able to qualify as a business, then your investors would be eligible to get this tax credit. This could be something that may help lure in some of that investment money at this time. Again, this is on the websites listed here and that application needs to be in by mid-August of this year. So, there’s a few more months there. But this one is coming right up.

So as far as grants, because a lot of people have them right now, this would be a really good time to look in to whether you’re in compliance with your SBIR or SBTTR grant. And remember what the rules are and whether you’re able to continue drawing down funds, as you previously were, and whether there’s any interaction between the PPP forgiveness or the FFCRA credit and your grants. Double dipping is not acceptable. We want to make sure that if you’re funding your payroll with grant funds that you weren’t also trying to get those funds forgiven for your PPP loan. It’s great that they’ve extended the period of forgiveness to 24 weeks because it provides a lot more flexibility for grant holders as they continue to draw down their grant funds. They’ll have a lot more time to get forgiveness for their PPP loan and spend that cash. Just remember, some grants are expense driven. You must spend the funds before you can draw down the grant funding. Some are milestone driven. Make sure that you are reviewing those grants and staying in compliance with those. Ideally, the goal is to front load your grant spending and spend the grant sooner than later and get that cash in as quickly as possible. But make sure while you’re doing that, that you’re not double dipping or double counting the same expenses for more than one type of government funding. That’s mostly everything that we had to say. I know there was a lot of different information there, but we will be sending these slides out with a ton of links. Now I’ll turn it over to Pam for some questions.

Pam Chelden: We did get a couple of questions through the webinar. Let’s see here. There was a question on, is there a way to benchmark my costs, like how my insurance calls, bank fees, etc., compare to best practices? A couple of things come to mind. One is we have a lot of clients that are very similar in size and space and so we can certainly compare our clients to understand what they’re paying. You can also work with an insurance broker to help you understand what your paying is really market and if there’s better rates out there. With the banks, you can also just go to multiple banks and get quotes. That takes a little bit of work and effort, but that’s certainly an option. There was a question on rent and security deposits. And I just want to point out that if you’re vacating your rent space, your office space, to make sure that you follow up and get your security deposit. A lot of times landlords will sit on that money and not give it back to you. They’re going to hold it for a period to make sure that the space was left according to the specifications in the lease agreement, just to make sure that you follow up and push for that security deposit. I think those are all the questions that we got. Again, hopefully you found the seminar helpful and got some tips on how to maximize your cash flow, how to take advantage of some of the PPP and the payroll tax savings that are out there.