ELFA 2020 Survey of Equipment Finance Activity reports new business volume grew 10.5% in 2019
New business volume grew 10.5% in the equipment finance industry in 2019, according to the 2020 Survey of Equipment Finance Activity (SEFA) released by the Equipment Leasing and Finance Association (ELFA). The rise in new business volume marked the 10th consecutive year that businesses increased their spending on capital equipment. The 2020 SEFA covers key statistical, financial, and operations information for the $900 billion equipment finance industry, based on a comprehensive survey of 100 ELFA member companies. While the report does not reveal the impact of the COVID-19 pandemic on the equipment finance industry—as it focuses on data from the fiscal year 2019—it provides insight into multiple aspects of the industry, as well as the state of the industry preceding the pandemic. Survey Highlights Key findings for 2019 as reported in the 2020 SEFA include: New business volume grew by 10.5% in 2019. The rise was stronger than the 4.4% increase achieved in 2018 and considerably stronger than the growth of the nation’s GDP, reported at 2.3% for 2019 by the U.S. Department of Commerce. By organization type, banks saw a 12.8% increase in new business volume, independents saw an 8.4% increase and captives saw a 6.9% increase. By market segment, new business volume grew 20.0% in the large ticket segment, 9.0% in middle ticket, and 8.1% in small ticket. From an asset perspective, the top-five most-financed equipment types were transportation, IT, and related technology services, construction, agricultural, and industrial/manufacturing. The top five end-user industries representing the largest share of new business volume were services, agriculture, wholesale/retail, industrial and manufacturing, and transportation. Delinquencies edged up in 2019 to 2.1%, from 1.8% in 2018. Delinquencies have been on the rise since 2013 when only 1.2% of receivables were over 31 days past due. Charge-offs increased marginally overall to 0.3% of average receivables in 2019. Credit approvals remained steady year-over-year, as did the percentage of those approved applications being booked. Employment levels grew slightly by 1.2%. ELFA also released a companion report to the 2020 SEFA called the 2020 Small-Ticket Survey of Equipment Finance Activity. The report, which focuses on small-ticket and micro-ticket equipment transactions among the SEFA respondents, found that new business volume in the small-ticket space grew by 5.8% in 2019. PricewaterhouseCoopers LLP administered the 2020 SEFA. The results were compiled from surveys sent to 352 eligible ELFA member companies in the first quarter of 2020. A total of 100 companies submitted 2019 U.S. domestic lease and loan data. “We are pleased to share the results of the 2020 Survey of Equipment Finance Activity,” said ELFA President and CEO Ralph Petta. “The world is a very different place today in the midst of the COVID-19 pandemic than it was in 2019. However, the 2019 statistics included in this report provide valuable industry benchmark data. The 2020 SEFA, the Interactive SEFA Dashboard and the personalized MySEFA data visualization tool are all designed to help users make more informed, data-driven decisions. We thank all the ELFA member respondents, without whom this leading industry data source would not be possible.” Access the 2020 SEFA Survey Results The latest survey data are available in a variety of formats. Learn more at www.elfaonline.org/SEFA: Full SEFA Report: The 300-page SEFA Report and companion Small-Ticket SEFA Report offers comprehensive performance metrics for 100 equipment finance companies. Interactive SEFA Dashboard: This online dashboard showcases executive summary data from over a decade of SEFA reports. MySEFA: This interactive data tool lets SEFA survey respondents track their own operational and performance statistics and compare them against their peers. Presentation: Save the date and plan to attend an interactive breakout session on the 2020 SEFA at the ELFA 2020 Business Live! virtual event on Oct. 27-28.
Time to reconsider
It is still a bit strange out there. I keep walking into office or retail facilities with no one to be found. I frequent a favorite restaurant or bar and there are only a few customers to be found, most of which I do not recognize. It is July and a LOT of people are still not working, or if they are, the job they came back to is not the same as the one they left. Doing some reading and research on this RECESSION leads me to believe this recession is much different because 80+% of us now work in a service industry where the business is done face to face, compared to the non-service sector made up of the cyclical agriculture and manufacturing industries. This recession is being identified as a SUPPLY AND DEMAND DRIVEN RECESSION. With an 80% service sector, the face to face component of the business goes to zero when people are forced to stay home or decide on their own to stay home for safety reasons. Thus, the service supply GDP disappears along with the related demand for goods and services because a significant number of service workers lost their jobs. While government programs and unemployment insurance helped stem the “consumption shock” those programs have a limited time cycle which will cause a second recession caused by additional fall-off of demand for non-service sector goods and related job losses. A DOUBLE WAMMY! I saw a summary of this scenario in John Mauldin’s weekly newsletter (Thoughts from the Frontline dated June 26) and it goes something like this: COVID shock- Decrease in Service industry revenues- Service and Non-Service Business Contraction- High Unemployment- Major Consumption Loss So, what this means is that this recovery is going to take longer than originally estimated because: Many of the service businesses closed down The non-service industries that do business with service operations will find big holes in their demand for goods and services. People that can are saving more reducing consumption further. It will take a long time before people feel safe to go out and travel. It could take years to get back to where we were. The point I want to make here is THIS IS NOT GOING TO BE YOUR NORMAL RECESSION RECOVERY. This is a new ball game with the repricing of every good and service. So, if you believe you will get through this like you did before that may not be the case. The old playbook may not work, and a new version required. Thinking about this further we should remove the word “may” and substitute “will” in the previous sentence. We started out estimating the recovery for your industry at 18 months. That probably should be 24 months. And if the scenario above is somewhat correct you can expect a pricing battle, contract term changes and customer demands like you have not seen before, with every OEM and competitor offering off the wall pricing and terms for any meaningful business. I then suggested you concentrate on work that improves your absorption percentage, working closely with customers to manage their recovery process, which could mean supplying products and services using out-of-the-box techniques. The key is keeping current customers, customize your services to meet their needs, find ways to bring “value-added” with every customer contact and manage customer credit to avoid material credit losses. If any of this means adjusting what you are providing now, then so be it. As far as the new playbook is concerned the #1 goal needs to have enough cash flow to cover expenses and debt service. What you must do to get there may be ugly, but it must be done. In the past, you may have created “recession” revenue assumptions thinking “We will be out of this shortly so there is no need for major changes.” You cannot take that approach this time around. You must do your homework finding out how revenue streams have been impacted so far for both dealers and OEM’s and assume that level of revenue will stick around for at least 24 months. At the same time, you must expect negative margin results, with both the revenue and margin results causing reductions in cash flow if changes are not made. Keep in mind that a dollar lost in this environment will take forever to recover. Thus, the need to rethink your entire operation from a cash flow perspective sooner rather than later. Managing your margins and cash flow are now the most important line items on your agenda. Managing the balance sheet is #2 on the list. Whatever it takes is on the table. People, locations, contracts, expenses, pay cuts, and cost-sharing will most likely have to be considered and implemented to generate positive cash flows. We began thinking that this pandemic would have a limited impact on the economy and your business. But we what we know now in terms of chaos in the service sector, and how that will impact your customers in the non-service sector have to be considered for planning purposes. This process will be good for you, your employees, and your banking situation. Expect your solutions to be really ugly. If they are not, go back to square one and start over. Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail editorial@mhwmag.com to contact Garry
Epax Systems forms new lease and rental division
Epax Systems of Los Angeles, CA, announces the formation of a new lease and rental division. Operating as Eco Rentals, the new division will focus on providing waste compaction solutions to businesses across North America. Leasing or renting equipment is an economical alternative that allows users to gain the benefits of compaction with no capital investment. With a large inventory of new, demo and pre-owned equipment, Eco Rentals can supply a wide range of compaction equipment including self-contained compactors, stationary compactors, vertical compactors, apartment compactors, as well as horizontal and vertical balers. In addition to conventional systems, the company also offers solutions for open-top containers and dumpsters with its line of Ropax Rolling Compactors. These unique compactors use a heavy rolling drum with large metal teeth attached to an articulating boom. As the drum rolls back and forth it crushes, rips, tears, macerates and compresses waste in the dumpster. “Historically, interest in leasing and rentals surges in times of economic uncertainty,” said Chief Operating Officer, Stefan Nielsen. “We are happy to be able to accommodate the demand.” Waste compactors can significantly increase the amount of trash that can fit in a container meaning fewer “hauls” by the waste disposal contractor and leading to significant cost savings. Eco Rental systems can be installed anywhere in the continental United States. Shipping, installation, setup, and routine maintenance are all covered in the low monthly maintenance fee. Rental rates start at as low as $235 per month.
Status Report: Your Pandemic financial position
Status Report: Your Pandemic financial position By now all dealers should understand their PANDEMIC financial position in terms of where they started (Mid-March), where they stand today and where they need to be to get fully comfortable they will come out of this situation still standing. A TOUGH ASSIGNMENT CONSIDERING NOBODY KNOWS WHAT TO EXPECT AND WHEN TO EXPECT IT. Here is what I recommend: Prepare budgets for three Sales Levels starting with the original budget for 2020, a second with a 25% drop in sales and a third with a 50% drop in sales, with the impact on your company depending on which revenue silos caused the most reduction. Carry out the 20 budgets to June 30, 2021, to reflect what help you may need from banks and vendors. You can adjust sales levels based on activity to date and solid expectations for your various profit silos. What you do not want to do is a plan for X and wind up at X – Material $$ in Sales. Better to beat the pandemic budget to ensure that your cost adjustments are where you need them to be. As part of the sales exercise both direct and indirect expenses need to be budgeted to arrive at an estimated gross profit for each budget. Each manager must bite the bullet and come up with a plan and be accountable for the plan until the industry returns to normal. Next, prepare a monthly cash flow analysis using the budget data to determine cash burn during your recovery period, and how much additional funding may be needed assuming at least an 18-month overall recovery period starting March 20. And keep in mind that cash flow is based on collections and not sales numbers. We all know that budgets are numbers on a piece of paper. Unless there is accountability to meet those numbers, you are just wasting your time. All managers must be made aware that any differences, either up or down, impact the actual cash balance reflected at the 18-month level. This exercise will help address fixed, semifixed and variable expenses, and do not forget that the cash budget includes bank and other fixed obligations appearing on the balance sheet. Schedule 2 meetings a week to review revenues and expenses and how they are trending compared to budget and cash flow analysis. This continues until you are over the hump. Once the budget and cash flow analysis is under control management should be looking for ways to change and adjust the operation and business plan to eliminate non-profitable segments of the business and at the same time evaluate all systems and processes to determine what is not working and what adjustments would make them work better. Let us face it, you need to reduce spending and optimize costs. Vendors should be approached regarding pricing and payment terms. WE NEED RELIEF FOR THE REMAINING SEGMENT OF THE 18 MONTH RECOVERY PLAN. Price reductions help if you are doing any buying. Stretching out payment terms really helps even if there is an interest charge involved. On the other hand, collection efforts and programs should be made available to incentivize customers to pay sooner than they normally would. GET THE MONEY IN WHILE IT IS STILL AVAILABLE. Financing arrangements should be adjusted to defer principal payments. Or how about interest-only for six months. This is where those projections and cash flow analysis comes in handy because it shows that you are managing the situation and have spent the time to adjust internally to meet the challenges presented by the pandemic. Spending, if any, should focus on areas that supply the bulk of your absorption factor. Make the effort to communicate with “profitable” customers to establish how you can assist them to get over the hump. Everyone is expecting a lot of change caused by the pandemic. Ask customers what they will be changing and revamp your product and services to meet those needs. Every crisis provides opportunities to take advantage of poorly managed competitors. Face it, there will be dealers who do not make it and you probably have an idea of who those dealers are. You could pick up market share buying up the assets of a failed operation or by just offering superior products and services to their customer base, which may be lacking as the competitor slides into bankruptcy. If you attack the customer base that is the prudent approach. Buying the assets is another matter that under these circumstances requires the involvement and support of your vendors. Wouldn’t it be nice to take advantage of this situation that improves the profit potential of your business? GET A HANDLE ON YOUR NUMBERS, ADJUST PROGRAMS AND FIX THE PROBLEMS BEFORE THE PANDEMIC WIPES YOU OUT! Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail editorial@mhwmag.com to contact Garry
U.S. Manufacturing Technology orders decreased in April 2020, the lowest monthly total since May 2010
U.S. manufacturing technology orders decreased 26% in April from the previous month to $225.8 million, the lowest monthly total since May 2010, according to the latest U.S. Manufacturing Technology Orders report published by AMT – The Association For Manufacturing Technology. New orders were 39% lower than in April 2019. Total orders through April 2020 were just shy of $1.1 billion, 28% lower than 2019 orders during the same period. “It should not come as a surprise that April numbers were low given the large-scale shut down of the global economy,” said Douglas K. Woods, president of AMT. “Data confirms that U.S. industrial production dropped lower than during even the Great Depression. “The encouraging news is that we are seeing an uptick in May MT orders. The aerospace and automotive sectors have begun retooling and are placing orders for new equipment to ramp up production in the fall. Some MT orders are being delayed, but we are not seeing any cancellations; in fact, April cancellations were lower than the 2019 average. “2020 will still be a down year for MT orders, and we think it is likely that manufacturing will experience uneven growth for the next several quarters. Oxford Economics has forecast a 50% decline in machine tool orders in 2020 (from 2019), and while they have also forecast a robust 84-plus percent increase in MT orders in 2021, this is still a 10% decline from where the industry stood before the pandemic. Consumer confidence, capacity utilization, and the unemployment rate are the key indicators that we will keep our eyes on as they chart future performance.”
SBA and Treasury Department announce $10 Billion for CDFIs to participate in the Paycheck Protection Program
The U.S. Small Business Administration, in consultation with the U.S. Treasury Department, announced that it is setting aside $10 billion of Round 2 funding for the Paycheck Protection Program (PPP) to be lent exclusively by Community Development Financial Institutions (CDFIs). CDFIs work to expand economic opportunity in low-income communities by providing access to financial products and services for local residents and businesses. These dedicated funds will further ensure that the PPP reaches all communities in need of relief during the COVID-19 pandemic – a key priority for President Trump. “The forgivable loan program, PPP, is dedicated to providing emergency capital to sustain our nation’s small businesses, the drivers of our economy, and retain their employees,” said SBA Administrator Jovita Carranza. “CDFIs provide critically important capital and technical assistance to small businesses from rural, minority, and other underserved communities, especially during this economically challenging time.” “The PPP has helped over 50 million American workers stay connected to their jobs and over 4 million small businesses get much-needed relief,” said Treasury Secretary Steven T. Mnuchin. “We have received bipartisan support for dedicating these funds for CDFIs to ensure that traditionally underserved communities have every opportunity to emerge from the pandemic stronger than before.” As of May 23, 2020, CDFIs have approved more than $7 billion ($3.2 billion in Round 2) in PPP loans. The additional $6.8 billion will ensure that entrepreneurs and small business owners in all communities have easy access to the financial system and that they receive much-needed capital to maintain their workforces. The Paycheck Protection Program was created by the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act) and provides forgivable loans to small businesses affected by the COVID-19 pandemic to keep their employees on the payroll. To date, more than 4.4 million loans have been approved for over $510 billion for small businesses across America. The SBA and the Treasury Department remain committed to ensuring eligible small businesses have the resources they need to get through this time.
PPP Loan Forgiveness takes another turn
Chicago businesses that received a loan from the Paycheck Protection Program (PPP) have been awaiting guidance on loan forgiveness. Since the PPP was launched quickly to distribute desperately needed business funds, the traditional process for developing and publishing guidance has been bypassed. This has resulted in a piecemeal approach to providing information on loan forgiveness and even the delayed publication of the PPP Loan Forgiveness application. Naturally, borrowers were relieved to have some direction but found some questions were left unanswered. Just before the Memorial Day weekend, on May 22, 2020, The Small Business Administration (SBA) and Treasury issued an update to the Interim Final Rule (the rule) which offers new guidance. Several topics were addressed including offers to rehire employees, forgiveness limits for the self-employed, and information on the forgiveness process. To help clients, prospects, and others, Selden Fox has provided a summary of essential points below. PPP Loan Guidance Update Loan Forgiveness Process – While the SBA stated they will issue a separate update on loan forgiveness; new information was provided about the overall process. The first step is for the borrower to complete and submit the loan forgiveness application to the lender. If the lender determines the borrower is entitled to forgiveness, then they request repayment from the SBA. The lender has 60 days to render a decision. If the SBA accepts the lenders’ decision, they will remit the forgiveness amount along with accrued interest no later than 90 days after the decision is made. However, if the SBA determines the borrower was not eligible to receive a loan based on the established criteria, then the borrower will be ruled ineligible to receive loan forgiveness. Application Deadline – Many borrowers have been seeking guidance on the deadline for submitting their loan forgiveness application. Unfortunately, the Rule does not provide specific details about when the borrowers are required to submit their application. Borrowers will need to wait to find out when applications have to be submitted. Payments to Furloughed Employees – There has been some question about an employer’s ability to receive forgiveness for compensation including salary, wages, and commissions, to furloughed employees. Yes, the Rule states that as long as an employee’s total compensation does not exceed $100,000 on an annualized basis, additional wages such as hazard pay, and bonuses are eligible for loan forgiveness. Advance Payment of Mortgage Interest – Many borrowers have wanted to know if advance payments of mortgage interest can be included as a non-payroll expense for forgiveness. The answer is no. The rule explicitly prohibits these expenses from being eligible for forgiveness. Offers to Rehire Employees – The recent guidance around whether employers who successfully attempt to rehire laid-off workers is reiterated. However, the Rule provides additional information on the conditions under which loan forgiveness would not be impacted. This includes a certification the borrower made a good faith written offer to rehire the employee during the covered period, it offers was for the same salary, wages, and hours earned on the employee’s last day of employment, and it was rejected. Finally, the borrower must inform the state unemployment insurance office of the rejected offer within 30 days. Loan Forgiveness Limits for the Self Employed – The Rule also clarified there are limits to the amount of loan forgiveness available to owner-employees and the self -employed. Specifically, payroll compensation can be no more than the lesser of 8/52 of 2019 compensation or $15,385 per individual, in total, across all businesses. Specifically, owner-employees are limited to the amount of their 2019 cash compensation and employer retirement and healthcare contributions. Schedule C filers are limited by the amount of owner compensation determined by 2019 net profit. Finally, general partners are limited to the amount of their 2019 net earnings from self-employment times .9235. There is no additional forgiveness for the latter groups with respect to healthcare and retirement contributions because these expenses are paid out of net self-employment income. About the Author: Brian Eagan specializes in providing high-level interim CFO and controller work for small to medium-size businesses, including non-profit and local government agencies. In this role, Brian makes himself highly accessible to clients by phone and e-mail, in addition to appreciating the importance of performing some of these services onsite at clients’ offices. While it appears, there are more puzzle pieces yet to be placed on the table, the recently updated Rule provides important information for borrowers. As the covered period for some Chicago businesses quickly comes to an end, it is essential to review expenses and payroll costs to ensure you are in the best position possible. If you have questions about the information outlined above or need assistance with another COVID-19 issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.
Now what?
Good question. Who the hell knows? But whatever it is we all need to be prepared to address the permanent changes we can expect as a result of this medical and economic event we are currently living with. Last month I addressed the seven major issues facing your industry. The article was prepared pretty much before the spread of the virus along with the mediation policies were adopted to the full extent. Consequently, I believe I may have a bit aggressive when I mentioned a three to six-month timeframe before we get back to normal. Since then I have both extended my “normalcy” date to at least 24 months while at the same time not knowing exactly what the new normal or new reality will look like. But one thing is certain. You will be doing business differently. The dealer business will change. How you deal with suppliers and OEM’s will change. Interacting with employees will change. And how you communicate with and service both potential and existing customers will require new programs, policies, infrastructure, and technology. Here is what I personally see happening: DIGITAL IS HERE TO STAY. EMPLOYEES WORKED FROM HOME AND LIKED IT. OFF-SITE WORKING CAN BENEFIT YOUR COMPANY YOU WILL HAVE TO DO MORE WITH LESS GROWTH OPPORTUNITIES WILL SURFACE TOP OF THE LINE CUSTOMER SERVICE A MUST THE MARKET TO REPRICE VALUE OF GOODS AND SERVICES TAX SAVING OPPORTUNITIES AVAILABLE. That is my initial list. You can add or subtract as you see fit and I would like to hear what you added to the list. Let me know. Looking at my list now I can see where many items on the list interact with other list items and three main themes stick out. A TOP OF THE LINE DIGITAL ONLINE PRESENCE IS A MUST BECAUSE OF THE MARKET TURMOIL YOU WILL NEED TO REVIEW EVERY ASPECT OF YOUR BUSINESS EMPLOYEE RELATIONSHIPS WILL CHANGE. Notice that I did not mention any of the Government stimulus programs. Hopefully, you were on top of the issue and obtained capital to keep the business running. Just make sure you follow the rules associated with the funding which will be reviewed when you seek forgiveness. I am amazed at how fast those programs were developed and implemented. The Payroll Protection Program opened on April 3rd and I had my application filed at 8:30 pm on the 3rd and received the funding ten days later. Amazing. Back to the future. As far as customers are concerned, I think that we can surmise that they are also dealing with a new set of fears, uncertainly, and trust issues. Dealers who can address these issues NOW have an opportunity to increase market share. Customers are looking for seamless service, new ideas, pricing considerations, and in general any assistance you can provide including your industry expertise for their type of business. Can you provide this level of service? Because of what your customers are going through and will continue to go through I can well anticipate changes in your expected profit centers which overall will produce both a profit and cash flow squeeze. Consequently, it may be time to rethink your entire business and revenue model. What will sell going forward? Where and how to market. Investments to make in technology. Manpower adjustments. Employee involvement. Taking all the changes into account most dealers if they hope to maintain a healthy bottom line and cash flow will need to do more with less. Fewer assets and less cost. In other words, clean up the balance sheet and resolve not to add to the left side of the balance sheet. In terms of cost, it is time to review all current processes and policies in place to see if they still work and fit current customer needs. What especially needs to be reviewed is the digital presence and how it is used to streamlines customer service and add values to the relationship. If it does not you are going to be in trouble if your competitors do. The best thing you can do is to fully explore a work from home program. They work. Employees like it. Adequate controls are in place to secure data and workflow. And they are cost-effective. You supply a company only laptop and printer to your employee, invest in a program that supplies a company the only network for this type of work and employees have access to all files in the cloud, can communicate with other employees and customers without dialing a phone, can participate in meetings visually and use conference calls when necessary. Now what work from home really does for you allow you to engage permanent part-time contractors with higher-level skills than you currently have in your workforce to work on certain aspects of the business to improve the systems, profitability, and cash flows. In short, you can eliminate less talented full-time people and substitute expertise where and when you need it. The result is more productivity and less cost, which is just what the doctor ordered if you need to do more with less. One last thing. If you did not read Steve Pierson’s column last month dealing with the tax opportunities available by recent changes to the tax code, please do. There are MAJOR beneficial changes available with the use of operating losses and interest expense deductions plus many more. Steve has been involved in the dealer business with me for many years. If there is money to be found he can find it.
Prepare for a Post-COVID-19 Business Sea Change
Few businesses have been left unscathed by the novel coronavirus (COVID-19) pandemic. Unfortunately, many have been mortally wounded. Some may be living on life support thanks to financial help from the government, but their long-term survival is in doubt. That may not be inevitable, however, particularly for businesses that are proactive. Business advisors are instructing companies to be resilient and nimble to come out on top. What does that mean for your business? Having deep pockets is one form of resilience. It gives you the ability to endure a sustained revenue drought while still keeping employees on board and your vendors, your landlord, and other creditors on good terms. But resilience is also a state of mind: that is, being able to have faith in the future, think and act creatively under duress to make a better future possible. Agility and Resilience Agility is a cousin of resilience. It’s the ability to turn on a dime, perhaps on a regular basis, to act promptly to adopt new tactics. Think of an Olympic gold medalist. Or the former Vogt Coach Lace Company, which was founded as a manufacturer of buggy whips in Rochester, New York, in the late 19th or early 20th century. Vogt pivoted and became Voplex Corp. which sold plastic parts to the auto industry. Armed with resilience and agility, how do you gear up for a new business world? First, think about anticipated lasting changes being brought about by the pandemic. Here are a few scenarios that could arise in the consumer sector and affect your business: Depleted financial capacity. Some people who lost their jobs during the pandemic may come out the other end with no savings and greater debt loads. Their willingness and capacity to make non-essential purchases, particularly including any that require financing, will be limited. Newly cautious and frugal consumers. Even people who haven’t lost their jobs (which is a large majority of the working population) are potentially fearful they could be without a source of income during the pandemic. That can have a lasting effect on people. After watching their investments bounce around wildly in volatile securities markets, they may become zealous savers and limit their discretionary spending. Many people who have been forced into early retirement by job loss, and others who were already retired when the pandemic hit, were rattled by the financial market upheaval and the death toll caused by the pandemic. As a result, some may cut spending to the bare essentials. Not all of these people will stay away from restaurants, nail salons, jewelry stores, and similar businesses entirely. But they’ll visit them less often and be more price-sensitive when they do visit. New Supply Chains What about your sources of supply and the cost of items you need to operate your business? Even before the pandemic hit, the heated trade relationship between the U.S. and China was prompting many U.S. companies to diversify their supply chains to include other countries. And now vulnerability to disruption if a company’s supply chain is dominated by one country is even more evident. However, replacing low-cost offshore suppliers, possibly with U.S. manufacturers, is likely to raise costs. That, in turn, would put pressure on prices. If buyers of your goods are unwilling to pay higher prices, you’re in for a financial squeeze. Alternatively, it’s possible that rising prices for consumer goods could become the norm. That may increase pressure to raise wages so that workers can maintain purchasing power, and the U.S. might be due for a jump in inflation rates. Outside of the financial realm is the social impact of the pandemic and its possible implications for your business. People who became much more highly sensitized to the risk of being infected by strangers may not drop their guard even after the health risk posed by the current virus is diminished. That means they may avoid businesses where customers must be close together, such as crowded restaurants, theaters, and the like. Cost-Saving Opportunity? So much for the negatives — unless you’re in the travel and hospitality business. Expectations are emerging that when air travel is less medically hazardous and restrictions are eased, business travel won’t jump. Why not? Because video conferencing has become standard operating procedure and many face-to-face meetings aren’t considered essential anymore. Your reduced travel budget can stay that way, or so the theory goes. And while not every job can be done at home, many can. Employees who aren’t missing their commute and are able to be productive working from home may insist on spending less time at the office. That, in turn, could cause you to rethink how much office space you need to rent, heat, and cool. Or not. Regardless, the best person to anticipate how your business will change or need to change in the months and years ahead is you. The point is to think about it in a comprehensive and systematic way — and be prepared to act. And don’t limit your forecasting to a single expected “new normal.” “With so much uncertainty around so many fundamental issues, scenario planning feels like the most sensible option,” according to one commentator. Tamar Kasriel is a well-known business and social commentator and author of the book “Futurescaping.” Planning for scenarios, Kasriel says, requires trying to “distill the many uncertainties your business faces into two or three which are most likely and would have the biggest impact on your business.” If the scenarios are mutually exclusive, you’ll need to pick the one you consider most likely and impactful. And if future conditions for your business appear to be unfolding in another way, ideally it will be one of the alternative scenarios you had considered. If so, changing course accordingly will reveal the kind of resilience and agility that will carry you successfully into an uncertain future. While it’s too soon to predict with accuracy when the post-pandemic era will begin and whether we’ll recognize the business landscape when it gets here, It seems wise to consider the
Businesses: Think about Tomorrow when hunkering down today
Until recently, the number one concern for many employers was finding and retaining top talent. Today, to fight the novel coronavirus (COVID-19), many of those same companies are being forced to shed workers en masse. If you haven’t yet pared down your workforce or need to do some more trimming, what are your options? How you carry out a workforce reduction — and how you maintain contact after the cutbacks — can either engender loyalty and keep employees wanting to come back, or it can send them away feeling disgruntled. As employers trim their employee rosters, they have several options, including: Reduce employee benefits — for example, 401(k) matching contributions, Furlough workers, Lay off some or all of staff, or Cut nonexempt employees’ hours. (Note: Reducing the hours of salaried exempt employees doesn’t allow you to cut their pay proportionately under the Fair Labor Standards Act.) The less drastic the measures, the easier it will be to keep valued workers available to rejoin the company when you need them. In part, it depends on how much time has elapsed since they were let go. Don’t underestimate the importance of the way you say goodbye. It will have an impact not only on your ability to bring those employees back on board but could affect your “brand” as an employer. Former employees who feel mistreated are only too happy to write about it on social media. Cutting Hours Cutting nonexempt workers’ hours lets you hang on to more employees, of course. While nobody wants to see their hours cut, they dislike being laid off even more, especially when unemployment rates are spiking. Not only do they retain some income, but they’re less likely to feel singled out for punishment since more of their coworkers are in the same boat. Note: Federal assistance (under the CARES Act) to employees harmed economically by the COVID-19 outbreak isn’t limited to employees who lost their jobs entirely. The law’s “Pandemic Unemployment Assistance” program can provide funds to workers who aren’t eligible for regular unemployment compensation because they still have some employment income. A special provision of the CARES Act focuses on supporting employees whose hours were reduced in a work-sharing arrangement. The benefits vary according to whether states — which administer unemployment programs — already provide some support for employees forced to take reduced hours. Twenty-seven states have such programs. Employees permitted to work with reduced hours are generally able to hang on to some of their employee benefits, which often represent a significant part of their total compensation. The picture gets more complicated, however, when employees are furloughed. Employee Benefit Implications With a furlough arrangement, the employee’s job is essentially put on hold. But in some respects, the employee is still under your economic umbrella. Plus, there’s an expectation that he or she will eventually return to full-time employment. The legal impact of a furlough, as it pertains to employee benefits, can vary according to its duration. For example, a health insurance company might not agree to maintain coverage for furloughed employees just because you continue to pay your customary share of the cost of their health benefits. Your contract with your carrier might become void if you’re covering people who aren’t working for you now and might not be employed by you in the foreseeable future. It’s critical to read the fine print on insurance contracts before making any promises to furloughed employees. There’s generally more leniency with 401(k) plans. While you can’t deduct any payroll-based employee payments to a 401(k) plan if an employee isn’t receiving a paycheck, employees can deal directly with the 401(k) provider for some transactions. For example, if the furloughed employees want to take advantage of the CARES Act’s liberalization of plan loan rules, they can do so but need to make payments on a loan by means other than payroll deductions. When Termination Is Your Only Option Using a furlough strategy can improve your chances of keeping valuable employees available to return to full-time status when you’re able to reopen your doors. But sometimes, a simpler straight layoff (which is similar to termination) is your only option, depending on your industry and the economy. Even then, you can still do your best to avoid losing those valued employees forever. One key to maximizing the chances of being able to rehire laid-off employees later is to be as generous and sensitive as you can when you pull the trigger. That can include helping terminated employees, either directly or through an outplacement service, to take advantage of available state and federal unemployment benefits. If you can afford to pay a severance benefit, that can instill loyalty as well. However, be aware that such a policy needs to be administered consistently. Also, if you structure a severance payment plan as a series of periodic payments instead of as a lump sum, that could delay a laid-off employee’s eligibility for unemployment benefits. Why? Your state might treat it as the equivalent of ongoing employment income. Keep Talking If you want to hold onto your workforce, don’t neglect to contact your staff in general, especially those you’re most interested in hiring back when the time comes. It’s best to avoid making an actual commitment to rehire them, but you can still keep communication friendly. The longer workers go without hearing news directly from you, the more likely they are to assume the worst and start looking elsewhere. Communication doesn’t have to be formal, but it should be regular. If there’s news you can share, your laid-off workers are probably eager to hear it. Whatever you do — group emails, texts, letters, Facebook posting on your company’s page or occasional phone calls to your most valued workers — don’t neglect to stay in touch so that, when times get better and you prepare to turn the “closed” sign to “open” your loyal staff is right there beside you.
Using funds from the Paycheck Protection Program (PPP)
If you were one of the businesses that successfully secured funds from the Paycheck Protection Program (PPP), it is now imperative you utilize those funds appropriately—in terms of timing and usage—in order to qualify for the eligible loan forgiveness. Additionally, you will need to keep the appropriate documentation of expenses to apply for the loan forgiveness, not to mention in the case of an audit. Here we review the type of expenses that should be utilized with the PPP funds in order to secure the loan forgiveness as well as what to consider in terms of documentation. Timing of Expenses First and foremost, forgiveness will be granted for the portion of the funds you utilize on expenses incurred during an eight-week period from the time the loan funds are received. Many businesses received those funds last week, so if funds were received on Friday, April 17, 2020, you should be tracking eligible expenses between April 17 and June 12, 2020. Use of Funds Depending on how much your business qualified for in terms of PPP funds you will want to make a concerted effort to utilize all or most of those funds for expenses that qualify for the loan forgiveness under the program. For this eight-week period, you likely have three to four payrolls that would qualify for appropriate use of the PPP funds eligible for forgiveness, so this is a good place to start. In addition to salaries, wages, and commissions, eligible payroll costs for forgiveness purposes can include retirement benefits, severance, vacation time, as well as parental, family, medical, or sick leave expenses. It is important to note this cannot exceed more than $100,000 per employee during this eight-week period. Additional payroll-related expenses include group health insurance, retirement benefit costs, and state and local payroll taxes. Beyond payroll expenses, PPP funds that qualify for forgiveness also include payment of interest on mortgage loan(s), rent with an existing lease agreement, utility expenses, and interest on other debt obligations incurred prior to receiving the loan. Necessary Documentation In order to receive the loan forgiveness, you will have to apply through the lender that secured the PPP funds for your business. The application for forgiveness will need to include documentation verifying the number of employees on the payroll, their pay rates, and payroll tax-filing information. You will also need to include verification of payments made on your lease or rent obligations, as well as your utility expenses. Finally, there will need to be a certification from the business and likely the lender that all documentation provided is legitimate and truthful and that the funds were used in accordance with the PPP guidelines for forgiveness. Here you will find PPP Forgiveness Planning Worksheet to estimate your loan forgiveness, to track expenses incurred, and a checklist of the information you will need to provide to present to the bank for loan forgiveness. This is a good template to start with to keep track of these expenses and the appropriate documentation to submit for loan forgiveness following the 8-week period. Your lender may have specific forms for you to complete but by using these worksheets to track your expenses as they are incurred you will be collecting the information you should need for any lender provided forms. About the Author: Brian Eagan leads the firm’s Accounting Solutions group and has been responsible for leading this department since 2008. Under his leadership, the department has grown significantly thanks in large part to the group’s ability to identify, develop, and retain top-level talent. Currently, in addition to leading this group, Brian specializes in providing high-level interim CFO and Controller work for small to medium-size businesses, including non-profit and local government agencies. In this role, Brian makes himself highly accessible to clients by phone and e-mail, in addition to appreciating the importance of performing some of these services onsite at clients’ offices. As part of new client integration, Brian will evaluate the services and client needs, and together with management develop a streamlined communication process and a regular site visit plan. Brian received his B.S. in accounting from DePaul University in 2001. Upon graduation, he began his career as an accounting assistant with an insurance firm in Chicago. Within three years, Brian had been promoted to controller. In 2004, Brian began to seek new challenges, which led to him join the Selden Fox team in the audit department. After four years in the audit department, Brian transitioned into the firm’s Accounting Solutions group. His background in auditing and experience as a controller provides him with an excellent skill set to assist clients from an accounting and business perspective. Brian is a licensed CPA and a member of the American Institute of Certified Public Accountants and the Illinois CPA Society. He is a member of the board of directors of the West Suburban Chamber of Commerce and Industry.
Get ready for the restart
The Coronavirus epidemic has abruptly and unexpectedly changed the operating environment. Even if your company wasn’t impacted financially, the human toll on your staff, customers, and partners has likely been a management challenge in and of itself. Here’s the good news: this, too, shall pass. Market recoveries followed the 2007-08 financial crisis, the 2001-02 tech bubble burst, and the 1987 market crash. We should expect the same in this instance of economic turmoil. But companies navigating the current crisis can’t simply run out the clock and await their silver lining. Instead, now is the time to prepare for the restart with careful planning and some soul-searching. Consider the following steps if you’re looking for a roadmap to develop your post-coronavirus strategy. Acquaint yourself with the CARES Act The sweeping federal stimulus package, passed in late March, contains several low-interest loan and grant opportunities for small and mid-sized businesses. Consider that the typical company only maintains cash to cover operations for 27 days. In a normal environment, that may seem fine, but things have changed. Among the resources made available by the CARES Act, you can now apply for a loan with generous repayment terms to cover various short-term expenses like payroll. For details and application information, visit the SBA’s Coronavirus Resources page. https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources Don’t give up on new business Every sector deemed critical by federal and state authorities (healthcare, energy, defense, etc.) invests large sums of money in repairing, upgrading, and building new facilities and infrastructure to help them deal with this crisis. The CARES Act has set aside funding for related projects, which could produce a consistent pipeline of work for the foreseeable future. Keep an eye out for new projects where you can deploy resources. Get your finances in order If you’ve always sought to bolster your accounting and financial reporting functions, but daily business kept getting in the way, now is the time to take on these projects. A credible financial dashboard is your most essential tool during a crisis. Keep an eye on your working capital and quick ratios, and be honest in your assessments. If problems are looming, don’t wait until you miss a payment or find yourself in an unmanageable cash crunch. During market downturns, financial institutions and non-bank lenders are generally willing to strike forbearance agreements, make loan modifications, or provide other solutions, including short-term funding. But remember, timing and candor are critical. When you leave your financial partners in the dark, they may misread the situation. That can have consequences. Maintain open communication with your clients and team During difficult times, everyone is feeling additional stress. Your clients need reassurance that your product or service will be delivered as usual. If those commitments can’t be kept, they must hear why and when they can expect fulfillment. Setting expectations based on the best information you have at the time is good practice. Meanwhile, your employees need clear guidance. Your rank-in-file should hear what you’re doing about the situation and how it may impact their livelihood. Top associates must be informed and properly empowered to communicate on your behalf whenever necessary. The more you can keep an open dialogue, the less you leave up to speculation and the anxiety of your stakeholders. And when you maintain relationships with your stakeholders during difficult times, the stronger the relationships will be once you pull out of the crisis. Spin up some internal projects If you can keep your staff working and engaged, even if they’re not directly interacting with customers, that’s a good thing. Use this time to perform overdue maintenance, cleaning, or other projects that have gone by the wayside because you were too busy. The more you can do to be prepared when things turn, the faster you can service your customers and generate new business. Get your sales materials, office space, inventory, and equipment ready to spring into action. Prepare your business for the next crisis Start by re-evaluating your capital reserve. Is your current cash position manageable? Would you have been better served by a more conservative strategy? If you’re dissatisfied with the answers to either question, be prepared to engage your accountant, financial advisors, and banking partners for some constructive solutions. You’ll likely find answers in budgeting tweaks, balance sheet modifications, and lending arrangements. Take a hard look at your wealth concentration Are your personal finances diversified, or are your holdings heavily weighted in your business? Many business owners have most of their net worth tied up in their company. Times like these reinforce the theme that having all your eggs in one basket doesn’t always work. The economic environment comes in cycles, and once the window to gain some liquidity opens again, you may want to take the opportunity to diversify your wealth out of the business. Don’t miss the next window. Take the time now to consider minority sales, dividend recaps, and employee stock ownership plans (ESOPs). https://info.csgpartners.com/what-is-an-employee-stock-ownership-plan-esop The sad fact is that not all companies will survive this crisis, but if you’re resourceful, prepared to do some planning, and utilize available resources, you stand a much better chance. If you can get through this, there will be unique opportunities to capture market share and further new partnerships that would never have arisen otherwise. Nathan Perkins is recognized as an expert in the investment banking space and speaks regularly on the topic of ESOPs as a liquidity strategy for business owners. Throughout his 20-year career, he has advised on over 300 ESOP M&A transactions encompassing over $1 billion in value. Prior to joining CSG in 2014, Nathan was a Vice President at Bank of America Merrill Lynch, where he focused on ESOP strategies for ultra-high-net-worth families. He held a similar position at Morgan Stanley for over seven years.
U.S. Manufacturing Technology Orders increased in February 2020: Covid-19 Pandemic upends U.S. Economy and Manufacturing Industry
U.S. manufacturing technology orders increased 3 percent in February from the previous month to $277.9 million, according to the latest U.S. Manufacturing Technology Orders report published by AMT – The Association For Manufacturing Technology. New orders were 16.5 percent lower than in February 2019. Total orders through February 2020 are $547 million, 26.2 percent lower than YTD 2019 orders. “Before the pandemic hit, we had predicted lower manufacturing technology orders in the first half of the year with a pickup in the second half,” said Douglas K. Woods, president of AMT. “Clearly the downturn will be much more severe than could have been anticipated. While we still expect a rebound later this year, this recovery is likely to take an extended period of time to get to pre-crisis levels as the global economy, the U.S. economy, and the manufacturing industry slowly regain their momentum.” “While all industries are being affected, and some more than others, with cancellations of orders or postponement of expected orders, due to long lead times of some industrial equipment and urgent retooling to meet crisis-related production some pockets of investment are continuing. As we progress out of this crisis the manufacturing technology industry will be critical in scaling up the products and equipment our economy needs going forward such as air filtration equipment, laboratory and medical equipment, automation, pharmaceuticals, PPE, defense and other products. These opportunities will create momentum in the manufacturing technology industry well into 2021 and beyond supplying both domestic and global needs.” “The pandemic has clearly exposed the risks of excessive reliance on non-diversified, global supply chains to produce the necessary products and equipment in a time of crisis—be it an outbreak of a disease, an economic crisis, or a large military conflict. Centralized supply chains in foreign countries have proved to be detrimental to the ability of the U.S. to effectively react to a global crisis. Revitalizing America’s manufacturing sector would provide the U.S. with “self-manufacturing-sufficient” supply chains to support our industrial base in a crisis.”
How marketing leaders can both manage the coronavirus crisis and plan for the future
In the economic recovery from the pandemic, marketing—the link between businesses and their customers—will play a pivotal role. Planning starts now The COVID-19 crisis is unprecedented. The speed with which it has spread and its effects on families and daily life have led to a deep sense of fear, anxiety, and confusion. The human toll has devastated many of us and continues to drive home the reality that the coronavirus is a tragedy that is upending lives around the world. Even as US companies try to get their arms around the human costs as the pandemic continues to spread, they are also struggling to understand the impact on their business and how to react. Marketers—many working remotely from home—are faced with an entirely new situation: How should we be talking to our customers? Where should we be spending marketing dollars and where shouldn’t we? How should we be working with our teams and our colleagues across the business? How are we going to stay in business? And all this on top of how can we support our family, friends, communities, and planet? There is much uncertainty about the future. That said, we are likely in the midst of a generation-defining event that will influence how consumers behave for years to come. This means that marketers—as advocates for the consumer in every business—have a critical role to play as companies shape their response. Marketers will need to be fast and pragmatic to manage the crisis, while also being strategic on how to weather the downturn. Some facts and hypotheses are emerging that we share in this article. We hope these can help marketing leaders determine what actions they can take and how they can start to prepare for a post-COVID-19 world. Consumer sentiment and behavior Consumer behavior and sentiment have fundamentally changed in a number of key ways: Adjusting to new realities. US consumer optimism in the economy is declining as the effects of the coronavirus pandemic escalate (Exhibit 1). As of April 1, however, some 75 percent of US consumers believe their finances will be impacted for more than two months by the pandemic, up from 69 percent two weeks before the week, and uncertainty about the economy is preventing them from spending, according to McKinsey’s consumer-sentiment survey. (Exhibit 1) Exhibit 1 Spend patterns are unsurprising—but stark, nonetheless. A short-term boost in spending has been unevenly distributed, with consumers rushing to get must-have-now items while virtually shutting off other categories. Grocery, household products, and home entertainment were the first categories to see consistent increases, while travel, out-of-home entertainment, food service, and even discretionary categories like apparel have cratered (Exhibit 2). Exhibit 2 Shift to online shopping. Online is becoming the channel of choice as consumers spend more time at home and there’s reason to believe that this behavior shift will endure at some level. Looking at China, which has endured the effects of COVID-19 for longer than the US, consumers have indicated that the rapid changes in shopping habits are likely to stick (eg, more than 55 percent of Chinese consumers are likely to permanently buy more groceries online). Despite the significant shift to digital channels, however, the surge in buying online has not come close to offsetting losses offline, where about 80 percent of shopping traditionally happened. New reality for media usage and advertising. With more consumers at home, media consumption is changing, too. We are seeing growth in at-home media consumption, with live news and movies or shows topping the list. But the increase in time spent on media is not necessarily driving higher ROI for digital media spend. Google and Facebook are seeing changes, some negative, to their business already. What marketing leaders can do Marketing as we know it has changed. With retail shut down, sports at a standstill, and upfronts effectively cancelled, many of the channels companies have traditionally relied on are out of commission. Clearly, shopping channels will reopen eventually. But marketers need to adjust to a very different environment in the short term. This will require putting in place dedicated crisis response teams who are focused on the most important revenue-related activities. Operating in agile ways—and remotely—they will need to focus on short-term business health priorities (eg, cash flow, “run-the-business” revenue targets) but at the same time put the business in a position to address longer-term realities and opportunities. Given the high degree of uncertainty for the foreseeable future, the success of these teams will depend on how effectively they can test, learn, and adapt. A company’s playbook will vary depending on its demand situation and sector. Consumer categories with high-demand products, such as cleaning materials or shelf- stable food, will need to act differently than big-ticket-item categories, where demand has dampened for now. Broadly, we believe marketing leaders will need to act across three stages: 1. Resolve and resilience: manage the now The playbook for reacting to the current crisis is anchored on four actions: Support employees, customers, suppliers. Given the scale of the humanitarian crisis we are facing, the number-one priority should be immediately changing ways of working to focus on employee wellness and health. Empathize and understand customers. Marketers need to get an immediate handle on customer motivations and behavior. While many companies believe they have a well-developed sense of their customers, circumstances are now so radically different that marketers should be questioning everything they previously believed to be true. It is crucial that this insight be understood not just by marketers but by the CEO, C-suite, board, and entire company. It will help them immediately recalibrate their messaging to address their customers’ new reality and engage with them more thoughtfully and authentically. Build up cash reserves. While the full implications of the crisis are not yet clear, marketers should act decisively to manage costs and increase productivity. Marketers need to do an immediate revaluation of media performance to identify inefficiencies and optimize programs by channel, improve efficiency in how work is done, eliminate agency overlap, and get a clear picture of where the money is
Congress Giveth, and the Agency Taketh Away – the Paycheck Protection Program Regulations
Late last night, the U.S. Small Business Administration (SBA) issued interim regulations, effective immediately, under the Paycheck Protection Program (PPP). We will save for our next cocktail party the fact that the SBA just issued regulations that at least at one point directly contradict the statute passed by Congress and signed into law by the President (I am partial to a good Manhattan, shaken, not stirred). But what you really care about right now is, “Lawyer, tell me how to get the money!” Without further commentary (and good unless and until the SBA issues any more guidance or regulations), here is what you need to know: Borrower Eligibility and Loan Terms (no change) What we said before remains the same: employers, for-profit and certain non-profits, with 500 or less employees in operation as of Feb. 15, 2020 are eligible for the program. For employers larger than that, you may still qualify under the SBA’s size standards for your industry. The SBA is yet to issue guidance on application of the affiliation rules at 13 CFR 121.103 and 121.301. When they do, we assure you, we will tell you all about it. As before the regulation, there is no collateral and no personal guarantee of the loan. There is no up-front guarantee fee paid by the borrower. Agents for the loans will not be permitted to collect fees from the borrower or be paid out of the loan proceeds. Maximum Loan Amount (no change) You may still borrow the lesser of $10 million, or 2.5 times the business’ average monthly payroll costs plus the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between Jan. 31, 2020 and April 3, 2020. The SBA recommends applicants seek the full amount they are eligible for because you can only make one application under this program. Exclusion of Independent Contractors from the Loan Amount Calculation (significant change) Despite the fact that the statute creating the PPP expressly allows the inclusion of payments of any compensation to or income of an independent contractor in the definition of payroll costs, the regulations expressly exclude independent contractors from the loan amount calculation. The regulations expect the independent contractor to apply for his/her own loan under the program. Time Period and Items Includable and Excludable from Payroll Costs for Purposes of Loan Amount Determination (some change) Includable: business must compile their payroll costs from the last 12 months, which should include: Compensation in the form of salary, wages, commissions, or similar compensation, as well as cash tips or the equivalent, paid to employees whose principal residence is in the United States; Payment for vacation, parental, family, medical, or sick leave Allowance for separation or dismissal; Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; and Payment of local and state taxes assessed on the compensation of employees Excludable: after adding up the items above, you must back out/subtract from those amounts: Compensation of each individual employee in excess of $100,000 annually; For the period Feb. 15, 2020 to June 30, 2020, all Federal employment taxes imposed including the employee and employer share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and Qualified sick and family leave wages for which is a credit is allowed under the Families First Coronavirus Response Act. Interest Rate and Repayment Term of the Loan (change from guidance, not the statute) The loan interest rate will be 1% (not the .5% from the SBA guidance earlier this week) with a maturity of two years. Repayment of the loan is deferred for six months although interest will accrue during that deferment period. Forgiveness and Reduction of Forgiveness of the Loan Amount (some change) The loan amount and all interest are forgivable if spent on the following: Employee and compensation levels are maintained At least 75% on payroll costs (accounting for all of the includable and excludable items set forth above in item 4 above) No more than 25% for non-payroll costs consisting of: Rent payments for leases dated before Feb. 15, 2020; Mortgage interest obligations incurred before Feb. 15, 2020; Utility payments under service agreements dated before Feb. 15, 2020; Interest on any other debt obligations incurred before Feb. 15, 2020; and Refinancing a SBA EIDL loan made between Jan. 31, 2020 and April 3, 2020 (make sure to consult with your counsel if you have an EIDL loan that you want to refinance with the PPP loan because it will impact the forgiveness process). The SBA expects to issue more guidance on the forgiveness process. Application Form and Certifications According to the SBA, applicants must complete and submit SBA Form 2483, which contains several representations, as well as payroll documentation such as payroll processor records and payroll tax filings. For independent contractors and sole proprietors applying on behalf of themselves, they should submit Form 1099-MISC in the case of the former and income and expenses from a sole proprietorship. The SBA expects to issue more guidance regarding the affiliation rules at 13 CFR 121.103 and 121.301. When they do, we assure you, we will tell you all about it. Misuse of the Loan Funds (significant change) The use of the funds for unauthorized purposes will require repayment of those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as fraud charges. If one of the shareholders, members, or partners uses the funds for unauthorized purposes, the SBA will have recourse against the person for the unauthorized use. And that’s all we can tell you right now, as of April 3, 2020. Hopefully, the SBA and Treasury Department don’t create any more issues for the business owners who are simply trying to keep their workforce gainfully employed. We will continue to provide you with information related to additional changes or updates to these laws. We are here for you. If you have any questions about this alert, or any other labor and
Business Tax relief provided by the Cares Act
As businesses seek to navigate the current reality, it is imperative they understand the relief opportunities provided by the federal government. With the signing of the CARES Act, there are business tax provisions that should be considered by business owners and executives. Here we review the tax relief provisions for businesses. Payroll Tax Credit The CARES Act provides for a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 pandemic. Eligible employers include those where their business has been fully or partially suspended as a result of the government’s social distancing order as it relates to commerce, travel, or group meetings, as well as employers who have experienced more than a 50% reduction in quarterly receipts (measured on a year-over-year basis). Nonprofits can be considered eligible for these credits under this criterion as well. The tax credit is for wages paid to certain employees. Those employees include all employee wages for employers with an average number of full-time employees under 100 in 2019. For those employers with more than 100 employees in 2019, the credit is available for only those wages paid to employees who are furloughed or who much work reduced hours as a result of business closure or reduced gross receipts. This credit is for wages paid after March 12, 2020, and before January 1, 2021. Wages are capped at the first $10,000 paid by the employer to an eligible employee. If a business is receiving Small Business Interruption Loans under the COVID-19 relief package, they cannot also take this payroll tax credit. Employer Payroll Taxes Delayed Under the CARES Act, employers can defer paying the employer portion of payroll taxes (social security taxes) through the end of 2020. The employer instead will need to pay 50% of the payroll taxes deferred by December 31, 2021 and 50% of the taxes by December 31, 2022. This deferral will also be available for those subject to self-employment tax. Similar to the payroll tax credit, if an employer has had indebtedness forgiven under the Small Business Act this deferral of payroll taxes is not permitted for those employers. Net Operating Losses (NOLs) Deduction Up to 100% The CARES Act temporarily removes the taxable income limitation to allow an NOL carryforward to fully offset income. Taxpayers can take an NOL deduction equal to 100% taxable income, rather than the 80% limitation under present law for tax years beginning before 2021. For tax years beginning after 2021, taxpayers can take both a 100% deduction of NOLs arising in tax years prior to 2018, and a deduction limited to 80% of modified taxable income for NOLs arising in tax years after 2017. Modified NOL Carrybacks The CARES Act provides that NOLs arising in a tax year beginning after December 31, 2017, and before January 1, 2021, can be carried back to each of the five tax years preceding the tax year of such loss. The provision also temporarily disregards NOL carrybacks for purposes of IRC 965 transition tax and contains special rules for Real Estate Investment Trusts (REITS) and insurance companies. Modified Loss Limitation The CARES Act temporarily modifies the loss limitation for noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020. The Act also includes technical corrections to the 2017 Tax Cuts and Jobs Act (TCJA) clarifying that excess business losses do not include any deductions related to performing services as an employee. It also clarifies that, because capital losses cannot offset ordinary income under the NOL rules, capital loss deductions are not taken into account in computing the limitation, and that the amount of capital gain taken into account in calculating the limitation cannot exceed the lesser of capital gain net income from a trade or business or capital gain net income. Acceleration of the Corporate Minimum Tax Credit (MTC) Under the CARE Act, corporations for which the alternative minimum tax (AMT) was repealed for tax years after 2017 may now claim outstanding MTCs (subject to limits) for tax years before 2021, at which time any remaining MTC may be claimed as fully refundable. So, the MTC is refundable for any tax year beginning in 2018 or 2019, in an amount equal to 50% (100% for tax years beginning in 2019) of the excess MTC for the tax year, over the amount of the credit allowable for the year against regular tax liability. This means, corporations can claim 100% of AMT credits in 2019. The Act also provides for an election to take the entire refundable credit amount in 2018. The claim for this credit or refund when the corporation chooses to take the entire refundable credit amount in 2018 will be treated as a tentative carryback refund claim. An application, as provided by the IRS, must be filed before December 31, 2020, for the tentative refund for any amount. The application must be verified for a tentative carryback adjustment and must set forth the amount of the refundable credit for the tax year, the amount of the refundable credit claimed for any previously filed return for the tax year, and the amount of the refund claimed. Once the application is filed the IRS has 90 days to review the application; determine the overpayment amount; and apply, credit or refund the overpayment. Business Interest Deduction Increased Temporarily The TCJA limited the amount of business interest allowed as a deduction to 30% of adjustable taxable income. The CARES Act temporarily increases that limit to 50% for tax years beginning in 2019 and 2020. Under the CARES Act, the following rules apply to partnerships for this business interest deduction increase: This increase in limitation only applies for 2020, not 2019 50% of the excess business interest will be treated as paid or accrued by the partner in the partner’s first tax year beginning in 2020 and isn’t subject to any limits in 2020 50% of the excess business interest will be subject to the limitations relating to the
U.S. manufacturing employment and new orders index falls
The Institute for Supply Management’s manufacturing PMI for March was 49.1%, one percentage point lower than it was in February. But that number belies the bigger picture of an industry wracked by the coronavirus pandemic. New orders, production, employment, prices, exports, and imports all contracted, according to the Manufacturing ISM Report On Business. The index measuring employment in the sector contracted for the eighth month in a row, to 43.8% from 46.9%, and at a faster rate this month than before. 43.8% represents the employment index’s worst reading since May 2009. Only 3 of 18 industry sectors surveyed reported an increase in employment: printing and related support activities, food and beverage companies, and electronics. Supply chains snarled by coronavirus chaos continued to confound manufacturers. The ISM’s index on supplier deliveries, which records less-than 50 scores on this index as accelerating deliveries and scores above 50 as slowing, grew from 57.3% to 65%, extending the trend for a fifth month. New orders contracted 7.6 percentage points from 49.8% in February to 42.2% in March, an 11-year low compared to March 2009, when the index recorded 41.3%. A respondent from the Plastics and Rubber Products sector said that all of their North American manufacturing plants had ceased operations or dramatically scaled them back. Another executive, this one from a nonmetallic mineral products company, noted that a large part of their business was the hospitality industry. “We are seeing demand drop and an increase in cancellations,” ISM reported. The coronavirus impact has trampled demand for travel and leisure industries, including hotels and airlines. Not every sector felt the blow, however, as some manufacturers whose goods support people spending much more time at home found: “We are experiencing a record number of orders due to COVID-19,” said a surveyed executive of the food, beverage, and tobacco sector. In general, the dearth of new orders for factories sent aftershocks through other metrics. As no new orders came in, factories had little to do, and the ISM’s factory production index slid 2.6 points to 47.7% in March. One surveyed executive in the machinery sector said COVID-19 was to blame for a “30% reduction in productivity” in their factory. Factory backlogs shrank, and the ISM’s backlog index fell 4.4 points to 45.9%. Factories imported and exported fewer goods in March, and both the new export orders and import indexes fell. Exports fell 4.6 points to 46.6%, while imports fell a mere 0.5 points to 42.6%, representing a contraction that is very slowly speeding up.
How to manage COVID-19 related business risks
The coronavirus (COVID-19) outbreak has had a crippling effect on the global economy. This is clearly uncharted territory. As millions around the globe do their best to minimize their exposure to the virus, business owners and managers face an uncertain and stressful future. Faced with faltering demand, anxious employees, health safety risks and a lack of clarity regarding what the future holds, what can small and medium-sized business owners do to prepare for a global economic slowdown? Here are eight steps to consider to help your company navigate these uncertain times Develop financial scenarios Create best, worst and most likely financial scenarios for your company. Consider these questions: How much do you estimate revenue will change over the short and long-run? Which costs are variable vs. fixed? How long will it take for you to run out of cash and inventory? Is there an extra cushion to draw from on your line of credit? Projecting financial statements for the next few months may require some guesswork, but the exercise may uncover areas that require immediate attention. For example, you may find an opportunity to reduce your costs by canceling, say, a subscription or downgrading a service. Scrutinize your cost structure It’s important to dedicate additional time to combing through every line item of your financial statements for costs to remove. As a general rule of thumb, if an expense doesn’t directly contribute to generating revenue, consider removing it. Also, look for ways to lower your costs. For example, if you’ve not switched insurance companies recently, now may be the time to seek an alternative, lower-cost provider. Reach out to lenders, landlords, and creditors As the effects of the economic slowdown take hold, many business owners worry that they’ll default on a loan, face eviction or be sued for unpaid debts. The federal government and many individual states have already taken steps to stop evictions. How far such government remedies extend and for how long remain unknown. If your business is unable to make a payment on a loan, mortgage or unsecured debt, be proactive and reach out to share your situation. You may find those you owe money to are receptive to amending the terms of your arrangement in these challenging times. Reconnect with key customers Reach out to major customers and learn about the challenges they face. This provides an opportunity to engender long-term customer loyalty and goodwill. Depending on your company’s financial health, you may be able to offer support, including providing discounts on future orders or extending payment terms. These conversations also will provide information to improve the accuracy of your financial projections. And you’ll open the line of communication in case of circumstances deteriorate further. Communicate regularly with employees It’s human nature to struggle with uncertainty. Make communicating with employees a priority — even if you have no news to share. Employees need to know you understand their concerns. They must also believe you have their best interests at heart. If you anticipate laying off staff or cutting their hours and know of companies in a hiring mode, share that information with employees. When normal operations resume, former employees may return if they remember your willingness to help them in times of crisis. Revisit your staffing model Ideally, small businesses would like to keep valued employees on the payroll as long as possible. But, for some businesses, now might be the time to engage contractors instead of full-time employees. By doing so, you’ll potentially lower your costs and increase your staffing model’s flexibility. Consider bartering Instead of exchanging cash with supply chain partners, be open to bartering goods and services with other businesses. Bartering allows you to conserve cash. Plus, connecting with other businesses may help uncover additional tools and techniques to help your company weather the economic fallout from the COVID-19 outbreak. (Be aware that bartering does have tax implications, however.) Monitor Government responses Federal and state governments are working on various financial relief measures to help businesses during these trying times. In addition to following local and national news, reach out to your tax, human resources, and legal advisors to let them know you’re interested in gaining access to government aid when it becomes available. Also sign up for email communications from federal agencies, including the Small Business Administration (SBA) and the IRS, to make sure you learn of the programs as soon as they’re available. We’re all in this together Now’s the time to confront the reality of COVID-19 head-on. That requires a collaborative effort with your customers, suppliers, employees, creditors and professional advisors. By working together to fortify your defenses, you’ll be in a better position to protect your business and ensure its survival during these unprecedented times.
It’s the Little Things
Thinking about this month’s column amidst all that is going on in the world, I came to a conclusion that when the market or uncertainty is paramount it is the little things that count if you are to attain your goal for a day, a week, a month or a year. Sometimes these procedures or reviews slip out of sight until you are discussing a problem, and someone brings up ideas about how to solve the problem. But before we get to the Little Things, I would like to ask you to think about our annual September One-Day Dealer Conference and what you like to see on the agenda. As you may recall MHW sponsored a one-day dealer conference focused on the HOT ITEMS facing the industry. We had about 60 attendees and I believe they all left knowing about enough about those HOT issues to properly follow up and avoid problems within your company So, what is important to you this year. LET ME KNOW! Email your suggestions to gbartecki@comcast.net Back to those Little Things. I would be remiss if I did not ask you to make sure you read both Dave Baiocchi’s articles regarding rental in the previous two issues. Suggest you print then up and distribute them to anyone involved in your rental operation. Reviewing your rental operation and procedures after reading these two articles is a sure way to find those little problems that are costing you money. How long will this take? Just print up or email the articles and then ask around for ideas from the staff. Next, I would suggest an hour-long meeting to discuss your business system, how it is working, what you are having trouble with or unable to do on the system. Your system rep should be in attendance to discuss your concerns and information needs as well as demonstrate how to mine data you were having trouble accessing. What you may find out is that all your problems are solvable with a little training or changes to the system using your rep to lead the charge to get those changes made. Based on my experience you will find ways to access data to help run the business, as well as find ways to accomplish tasks more efficiently. Probably the most rewarding thing you can do is follow the ideas presented in the UPGROW ads you see on TV. They state they have IT, marketing, and other service providers that you can hire on an as-needed basis to help you manage your sales process, provided reports you don’t have time to do, assist your management team with sales programs, email blasts, excel worksheets, website management, telematics and other permanent part-time jobs that would not be cost effecting on a full-time basis. As you know I constantly suggest finding young folks up to date on technology. They easily adapt to the system, website work, email work, and any other data maneuvering you need to learn how to run your business better. I myself have my herd of accountants, lawyers, bankers, website developers, marketing talent and excel experts to put presentations together for a group, a banker or a buyer. All reasonably priced with a quick turnaround. YOU CAN’T WIN WITHOUT THEM! For dealers that sell or rent Aerial Work Platforms, there are new ANSI requirements you need to comply with in order to reduce risk and liability. If you do work with these types of units, I suggest you have Certified AWP trainers provide training to customers and those who will be using the unit. The liability tail here is getting awfully long and you don’t want to get dragged into any lawsuit because of an accident where you let the unit out knowing the operator is not trained to use it. If you don’t want to do the training, make a deal with a local rental company that has Certified Trainers on the payroll and let them do it. Last but not least, compare your operating results to MHEDA’s Disc Report or other industry standards Or, if you find that you “STACKED” up in the upper quartile using the formulas I gave you last month you are probably going to compare favorably with the Disc Report. There you go. Five or six Little Things you can do to improve profits and efficiency. Don’t forget to let us know what you want on the September One-Day Dealer Conference that will be on Thursday, September 17th in Rosemont, IL. Details will be announced soon so give me your ideas today. Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail editorial@mhwmag.com to contact Garry.
IRS delays the April 15 tax payment deadline by 90 days
Most Americans can get a three-month reprieve to pay their income taxes for 2019, Treasury Secretary Steven Mnuchin said Tuesday, March 17, 2020 in a press conference. The IRS will postpone the April 15th tax deadline by 90 days for millions of individuals who owe $1 million or less and corporations that owe $10 million or less, he said. To be sure, Americans still have to meet the April 15 deadline if they are expecting a refund or are requesting a six-month extension, but they can defer payment for up to 90 days beyond that. “If you owe a payment to the IRS, you can defer up to $1 million as an individual — and the reason we are doing $1 million is because that covers pass-throughs and small businesses — and $10 million for corporations, interest-free and penalty-free for 90 days. All you have to do is file your taxes,” Mnuchin said. “We encourage those Americans who can file their taxes to continue to file their taxes on April 15 because for many Americans, you will get tax refunds and we don’t want you to lose out on those tax refunds,” Mnuchin said. “We want you to make sure you get them.” “All you have to do is file your taxes,” Mnuchin said. “You’ll automatically not get charged interest and penalties.”