Posts made in May 2020

COVID-19 Financial Management Strategies and Financial Contingency Planning

Not-for-profit organizations are almost always dealing with the fragile nature of their operations and existence. Fears of possible loss of major donors, fears of recession, changes in tax laws, changes in reimbursement revenues, changes in government regulations, and dealing with the ever increasing cost of operations, are always present.

What are some financial steps your organization can take to weather this pandemic and survive?

  1. Assess Available Cash and Reserves
    1. Your organization should know where you are with available cash.
    2. Determine how much of this available cash is unrestricted by reviewing your operating, money market, investment accounts, board reserves and review all receivable expected to be collected.
    3. Determine a typical month cash expenditures and might consider different scenarios.
    4. Determine days cash available by dividing available cash by a typical month’s expenditures to determine how long you can survive with no other sources of revenue or cash.
    5. Cash Flow projections over the next several months are important to identify future cash flow issues before they occur.
    6. Consider other possible sources of cash to include line-of credits, credit cards, board designated endowment funds, or donor restricted funds that would allow you to release restrictions for operating purposes.
    7. With this essential financial information, your board, management, and staff can work collectively to assess the urgency of the situation, make informed decisions, and develop a plan of action.
  2. Assess Impact on Organization’s Sources of Revenue
    1. Review sources of revenues and determine how they may change in the short term.   Keep in mind program service revenues may decrease significantly if the availability of these services decline.  Social service revenues may actually increase for services provided to vulnerable populations and fees for services contracts with federal, state, or local agencies may continue.  Grant making agencies and foundations may actually provide increased funding for short-term emergency needs
    2. Organizations who rely on investment earnings to fund operations should consult with investment advisors to determine projected investment revenues.
    3. Organization needs to prioritize those programs and activities with the most impact and profitability while considered reducing, delaying, or eliminating those programs and activities with less impact and profitability.  Can we reassign certain staff to those activities with greatest need and associated funding?  What is the financial impact if fundraising events need to be cancelled or rescheduled?
    4. Reach out to your supportive donors and foundations to explain to them your specific situation and what you are doing to address this crisis and your proposed solutions.  Also, ask them for for support and help during the crisis?   Board members and Executive Director should be proactive and contact donors directly to have discussions regarding what you are doing about crisis, your proposed solutions, and how they can provide help and support.  You might suggest to donors to consider making their annual contributions now when its most needed instead of waiting until the end of the year.  For donors with restricted contributions, you might ask them if you can use their donation for general operations.    You should communicate your plan of action with progress updates so your donors can track  your progress and needs.  You might consider in-kind donations in addition to cash donations for goods, services, and volunteers.
  3. Assess Impact on Organization’s Expenditures
    1. You can identify variable expenditures(payroll, travel, and office expenses) and determine to what extent they can be reduced while still allowing you to operate
    2. You can reduce those program expenses where you experience reductions in program revenues
    3. You can increase program expenses from those programs that see increases and reallocate staff and resources from other program areas.
    4. You should evaluate each type of expense to determine the projected increases or decreases to the projected budget.
    5. These maybe the time when difficult decisions need to be made regarding the reduction or elimination of programs and activities including the reduction of employees.  Would some employees consider some volunteer services in order to keep the programs going and increase their chance of returning to work in the future.  Keep employees informed of upcoming potential lay-offs or terminations.
    6. You should contact vendors and negotiate extended payment terms or payment plans.  Also, contact your landlord or banker to delay rent or loan payments.  You might check to see if you bank would consider interest only payments instead of full payments for a short period of time.

It is important to communicate with everyone in the organization to find solutions and have a collaborative approach.  Lower level staff may have a better hands-on evaluation of what specific measures need to be taken.  This crisis in not a result of lack of oversight, poor management, or bad decision making.  Everyone seems to be effected by this crisis so take comfort in knowing that we are all going through this together at the same time.    You organization can do it’s best by having a pro-active crisis response that’s decisive and provides timely and accurate communication to all.   You should be exploring all funding sources available to your organization including the federal loan, grant, and tax credit program available to help with these short-term financial needs.  You should take this opportunity to reach out and show everyone how you have taken control or your organization’s destiny.

There are 5 Nonprofit Finance Must-Do’s in the time of COVID.

  • Understand your cash position
  • Assess damage to revenue streams
  • Look at the dual bottom line to include financial and impact
  • Include everyone in the discussion
  • Communicate consistently

The following financial management strategies should be considered as financial contingency planning for your short-term financial needs with the following practical takeaways.

  1. Forgivable loans to maintain full operations.  You should pursue this option if you plan to continue at the same staffing level as you did before the crisis.  You will apply with your financial institution and it will pay your entire payroll for 8 weeks after funds are revised and pay your essential operating costs like rent payments, mortgage interest, and utilities.  We would suggest you track how these loan proceeds are used so you can maximize the loan forgiveness once these funds are spent.  Keep in mind the employer portion of Social Security and Medicare is excluded from the allowable payroll costs.
  2. Employer Social Security Tax Deferrals.  Employers can defer the deposit and payment of Social Security taxes from March 27, 2020 to December 31, 2020.  The deposit due date for 50% of the taxes is deferred to December 31, 2021 and the remaining 50% deferred until December 31, 2022.  Please note that an employer is ineligible to defer paying the Social Security Tax if it acquires a loan through the Paycheck Protection Program and receives a decision from the lender that the loan was forgiven.
  3. Families First Coronavirus Response Act – Employment Provisions.  Two weeks of emergency paid sick leave to quarantine, seek diagnosis, or preventive care including 2/3 regular rate for family member care.   Twelve weeks of emergency family and medical leave for those employer with more than 50 employees.  Employers paying the mandated paid leave are entitled to claim a refundable tax credit.
  4. Employee Retention Credit.  This is a fully refundable tax credit for employers equal to 50% of qualified wages from March 12, 2020 to December 31, 2020.  This is a great option for those organizations that have experienced a significant decrease in revenues or reduction in operations.   An eligible employer may not receive the employee retention credit if the eligible employer receives a paycheck protection loan.

You can use these financial contingency planning options, but feel free to customize what works best for your organization.  Let us know if we can provide assistance to help you make and implement these difficult financial decisions.

AICPA makes PPP loan forgiveness recommendations

The AICPA on Wednesday issued a series of recommendations it would like to see the U.S. Small Business Administration (SBA) adopt and issue as guidance for small businesses to use in calculating loan forgiveness under the Paycheck Protection Program (PPP).

In the release, the AICPA urges that:

  • The eight-week covered period under PPP should align with the beginning of a pay period, not the date loan proceeds are received.
  • The eight-week period should be flexible, with businesses able to choose to commence it once stay-at-home restrictions are lifted instead of when loan proceeds are received.
  • Full-time equivalents (FTEs) should be calculated using a simple wage-based proxy when hours worked are not tracked by the employer (e.g., for salaried workers or those paid by piece).
  • Payroll reduction calculations should be based on an employee’s average payroll per week in the eight-week period compared to the prior quarter, rather than comparing total compensation in the periods. Loan forgiveness is reduced if an employee’s compensation decreases by more than 25% but an eight-week period will naturally have 33% less payroll than a 12-week quarter.

The AICPA also addressed the eight-week loan forgiveness period in a letter sent late Tuesday to Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza. In the letter, signed by AICPA President and CEO Barry Melancon, CPA, CGMA, the AICPA lays out the case for changing the current interpretation for when to start the eight-week period for the forgiveness calculation component of the program.

Congress created the PPP as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The legislation authorized Treasury to use the SBA’s 7(a) small business lending program to fund loans of up to $10 million per borrower that qualifying businesses could spend to cover payroll, mortgage interest, rent, and utilities. PPP borrowers can qualify to have the loans forgiven if the proceeds are used to pay certain eligible costs. However, the amount of loan forgiveness will be reduced if less than 75% of the funds are spent on payroll over an eight-week loan forgiveness period.

Current guidance from Treasury and the SBA interprets the eight-week period as beginning on the date the lender makes the disbursement of the PPP loan to the borrower. However, the AICPA says, with many states still shut down by government order, most small businesses are unable to bring their employees back to work. For those businesses, starting the loan forgiveness clock on the date the lender disburses the funds means the recipient business must either pay employees while it is unable to operate or forgo the maximum amount of loan forgiveness. Flexibility in the start dates of the eight-week period would position more small businesses to survive and contribute to an economic rebound while working within the parameters of the CARES Act and subsequent guidance.

To address this problem, the AICPA letter urges Treasury to “[i]mmediately take a very simple but critical step and define the origination date as the date on which a state’s shelter-in-place order is lifted and businesses are authorized by government to return to full operations. This will provide the necessary flexibility for the 8-week clock to start, businesses to bring back employees and to pay sufficient payroll to meet the 75% requirement.”

Recommendations provided

The AICPA has received numerous questions from CPAs about the loan forgiveness portion of the PPP. Many of those inquiries have sought answers on the documents and calculations that should be used in applying for loan forgiveness to be awarded.

In response, the AICPA has developed recommendations for applying for loan forgiveness that have been added to earlier recommendations on how to apply for PPP loans. The full list of recommendations is available on the AICPA’s website.

The AICPA said in the release that it has requested further clarification on how reductions in forgiveness are to be applied. Specifically, the AICPA is seeking clarity regarding how reductions in forgiveness are to be applied and whether the CARES Act lists forgiveness reductions in the intended order of application, as some of the forgiveness requirements cause a dollar reduction while others produce a percentage reduction. The order in which these are applied can have a significant impact on the forgiveness amount.

The AICPA’s recommendations were made in consultation with an AICPA-led small business funding coalition, CPA firms, and other key stakeholders. They build on previous guidelines the AICPA has provided to help bring clarity to the implementation of the PPP.

The PPP so far

Congress established the PPP through the CARES Act, which was signed into law on March 27. The program is available to small businesses that were in operation on Feb. 15 with 500 or fewer employees, including not-for-profits, veterans’ organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors. Businesses with more than 500 employees in certain industries also can apply for loans, according to the SBA and Treasury.

SBA lenders were flooded with PPP applications from businesses in need of resources to help their businesses as the coronavirus pandemic and the consequences from social-distancing requirements devastated the economy. By April 16, the SBA had stopped accepting applications for the PPP after exhausting the initial $349 billion in funding. Last week, Congress approved an additional $370 billion in funding for small businesses, with $310 billion in fresh funds provided to the PPP. The application window for the second round of PPP funding opened Monday.

The AICPA’s Paycheck Protection Program Resources page houses resources and tools produced by the AICPA to help address the economic impact of the coronavirus.

For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA’s coronavirus resources page.

 Jeff Drew (Jeff.Drew@aicpa-cima.com) is a JofA senior editor.