I feel like there is reason for optimism for any of us following the stimulus plan. Yesterday the Treasury Department released guidelines to both lenders and borrowers on the PPL program that we have been following. More info on that down below.
The 13 Week Cash Flow
Most of us have a general knowledge of age-appropriate healthy-eating and exercise programs. What is generally missing is not the knowledge, but the persistence and execution. That perspective can apply to cash forecasting. It isn't complicated, and after you do it you're happy you did, but few people will stick with it until they see the real benefits.
First things first, here is a link to the file. Go ahead and download a copy of this Excel sheet and use as you see fit. https://seemorehawk.com/business-owner-resources/2020/4/1/13-week-cash-flow
The tool is self-explanatory, so I won't spend time on how to use it here. Instead we will focus on why to use it and what we can accomplish with it.
The number one reason for regularly using this tool is to be able to “see around corners”. We filter out all the noise of traditional accounting rules such as revenues, expenses, debt service, contracts etc. and focus only on cash coming in or cash going out. For most people, this type of reporting is not an option directly from your accounting system.
With discipline, this tool will tell you 1) when will we run out of cash and 2) how much is that shortfall. (Or, stated positively, 1) when will we reach our peak cash-on-hand, and 2) how much will that be.) To state the obvious, we don’t want to wait until we run out of cash to start shoring up cash. By then it is too late, and the options available are limited and unpleasant. We want NO SURPRISES here. Again, that is a function of discipline, not ‘knowledge’.
To make this tool even more powerful, combine it with the Simple Cash-On Hand Worksheet. Once you are clear on your target cash-on-hand, monitor your 13 Week Cash Flow for a dip below that target cash number. The combination of these should give you ample time to identify if things are trending the wrong way, and then make changes while you still have funds to hire experts to help. (Again disciple vs. knowledge – it is important to actually make changes, or the knowledge of the trend is worthless.)
The Latest On The Stimulus Plan
As noted above, the Treasury Department has gone open-kimono and shared an overview, eligibility, application, and even what lenders get for the PPL program. (That is one that has a forgiveness trigger.) To see copy of those, click through to https://home.treasury.gov/cares (they are all surprisingly short). The EIDL program has much less clarity right now, as it appears the government is focusing on the PPL first.
Some thoughts:
- The formula for max loan amount: Average monthly payroll X 2.5 = Loan Amount
- What counts as total payroll cost you ask? Well:
o Salaries, wages, commissions, or tips (capped at $100K, see below)
o Employee benefits including vacation, parental, family, medical, or sick leave; severance pay; group health care; retirement benefits
o State and local taxes on compensation
o For a sole prop/ind contractor; wages, commissions, income, or net earnings from self-employment (also capped at $100K annualized)
- When calculating the monthly average payroll costs, include your W2 employees, but not 1099 employees. (The 1099ers will need to apply directly.)
- When calculating the monthly average payroll costs, it is only up to $100K annually per employee. In other words, if someone’s salary was $350K, you can only include them as if they were making $100K (or $8,333/mo).
- Things are still a bit unclear for self-employed/sole proprietor/independent contractors, so it that is you, hold tight. What is hard here is that ‘sole proprietors’ can apply starting April 3rd, but ‘independent contractors’ and ‘self-employed’ can’t apply until April 10th. I have no idea what the difference between these will be in the eyes of the SBA. (So, error on the side of being a sole proprietor for now?)
- Your lender will need to verify your payroll costs, and it is largely expected that you provide some combination of:
o Monthly payroll records
o Monthly financial statements
o Prior year tax returns
o Maybe something else, but they will make is simple since they have a ton of these to process…
All though I am pleasantly surprised how this process has come along, i still feel like the bucket of funds available will run out far before all applications are processed. So my advice at this point continues to be file early. Make sure your bank knows you plan to apply. Do not expect them to reach out to you, as they are going to be buried.
As always, just visit www.timewithbrian.com to set up a time to chat if you have any questions.
Thanks,
Brian Gramm