COVID-19 Strategies: Prioritizing Your Bills When Revenues Are Down

By at 28 March, 2020, 1:36 pm

By Barbara Weltman-

The COVID-19 pandemic has impacted businesses, some much more severely than others. Many businesses have seen their revenues dry up completely, while others have had less than normal activity. With revenue down and cash flow diminished, companies need to prioritize their bills so they can remain in business and try to maintain their credit rating. Congressional stimulus packages, including the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law on March 27, 2020, should be factored into your prioritizing.

Review your budget

For business owners who’ve been through the 2008 recession, this may feel like a déjà vu experience. For newer owners, get ready to become aggressively proactive with your budget, if you have not done so already. Determine which items are “must pay” and which you “can delay” or cut entirely. Review your budget now and project new — reduced — expenditures going forward. This will help you pay off outstanding bills without bringing on unneeded new ones.

“Must pay” items

To stay in business, you must pay certain bills. Determine which ones are essential to your company’s survival.

Payroll costs. Retaining employees is an important long-term strategy for your business. While layoffs can produce immediate cost savings, in the long run, it’s more expensive to lay off workers and then seek to hire new ones (this approach comes with higher state unemployment tax rates and recruitment/retraining costs). Obviously, if revenues are drying up or greatly diminished, choices are greatly diminished.

You must continue to pay wages to employees. For salaried employees, wages continue even if you’ve sent them home. A company can furlough workers, which means they’re been laid off. This is a very tough business (and personal) decision that owners may have to make if it means the difference between surviving or going under.

The CARES Act contains added support for unemployment benefits, which could influence a decision about layoffs. It also contains an employee retention credit equal to 50% of paychecks (with limits) to incentivize you to keep employees on your payroll. And there is loan forgiveness for borrowing under the Paycheck Protection Program (explained below) for retaining or rehiring employees.

You must deposit payroll taxes. The CARES Act lets you defer the payment of the 6.2% payroll tax (the employer’s Social Security tax portion of FICA) for 2020, paying 50% by December 31, 2021, and the other 50% by December 31, 2022.

But other than that, you must follow your usual deposit schedule for all other payroll taxes. If you fail to deposit amounts withheld from employees’ paychecks, as an owner you may be personally liable for the 100% trust fund recovery penalty.

FYI: There is similar deferral for self-employed individuals paying self-employment tax, where 6.2% – essentially the “employer” share of Social Security taxes – can be deferred.

You must provide paid leave. If you have fewer than 500 employees, you’re subject to new paid sick and family leave requirements. There’s a potential exemption for those with fewer than 50 employees if paying the leave would threaten the viability of the business. New guidance will be forthcoming for small businesses, and there is a 30-day “non-enforcement period” for good faith compliance efforts. However, paying required leave should not cost you anything; the payments effectively are offset by payroll tax savings. You can use the funds that would have been deposited and, if insufficient, obtain an accelerated refund. (See SBE Council’s blog post on the latest DOL/IRS guidance here.)

Overhead. You must continue to pay the rent for your facilities, whether you’re using them currently or not. Landlords may grant payment extensions or forgo rents for a while. For example, there have been news reports of landlords waiving rents for certain commercial space for up to 3 months. Similarly, you must continue to pay utilities – electricity, Internet access, phone service – to stay in business. Cutting down on usage (e.g., using energy-saving practices if you’re not already using them), will trim bills going forward.

Note: Telecommunications providers both big and small have taken the “Keep Americans Connected” Pledge during the COVID-19 crisis. Created by the Federal Communications Commission, this is a program whereby providers have pledged that they will not disconnect residential or small business service for 60 days and will waive late penalties. Read more about it and the companies that took the pledge here.

Vendors. If you need inventory and supplies, you must pay your vendors. However, check with them to see whether terms can be eased. For example, instead of net 10 days, perhaps you can agree to net 30 days to reduce the pressure on current payments.

“Can delay” items or cut them

Scan your budget line by line to determine where you can find meaningful savings. Some expenditures can be delayed, while others can simply be eliminated.

Travel. Obviously, with the current status of COVID-19, business travel is essentially done for the moment. Projected travel costs that won’t be incurred are an improvement to your budget. Substituting teleconferencing can keep you connected at little or not cost. If you find this works well, you can continue this practice even after travel bans are lifted, saving you money going forward.

Employee benefits. Review employee benefits that can be modified to rescue your budget. For example, if you have committed to making certain matching contributions to employees’ 401(k) plans, you are allowed under a safe harbor rule to reduce or suspend them. However, you must provide supplemental notice to employees to give them the option of also modifying their elective deferrals to the plan. Also check for other planned or proposed employee perks large and small that can be trimmed (e.g., no summer company picnic).

Miscellaneous costs. Subscriptions to publications and podcasts, dues to certain business organizations, and similar expenditures can simply be eliminated. If you terminate subscriptions that you’ve already paid for, you may be entitled to a partial refund.

Understand what the stimulus package means to you

Your budget prioritizing may be aided substantially by cash you can receive through the two stimulus packages. The Paycheck Protection Program is an expansion of the SBA’s 7(a) loan program (the government is now guaranteeing 100% of loans made by SBA-certified lenders).

Under the new program, loans can be made to businesses with up to 500 employees, as well as to sole proprietors and independent contractors. The program is designed to provide your business with cash now and loan forgiveness if you keep employees on the payroll. The loan forgiveness is equal to the amount spent during an 8-week period after the origination date of the loan on payroll costs (up to $100,000), interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.

The interest rate is capped at 4%, with no prepayment penalties. Loan amounts are limited to 250% the size of payroll. There are no borrower or lender fees, credit tests, collateral, or personal loan guarantees.

The Paycheck Protection Program is in addition to the $50 billion SBA Economic Injury Loan Program supplemented by the first stimulus package and modified by the CARES Act, which provides low-interest rate direct loans up to $2 million from the SBA. These loans are from the SBA and not through commercial lenders.

Also check on loan programs and other business incentives through your state. For example, Florida offers a loan up to $50,000 to small businesses within the state that’s interest free if repaid within a year.

Final thought

During this unprecedented crisis, things are changing day to day. This is a good time to stay in close contact with your business network and advisers to stay up-to-date on the latest programs or new strategies for surviving – then thriving – once we get to the other side of the COVID-19 crisis.

Barbara Weltman is a member of SBE Council’s advisory board, and has been a leading consultant for small businesses of every kind for over twenty years. She’s the founder of Big Ideas for Small Business® and has written numerous books on small business operations, including J.K. Lasser’s Small Business Taxes, Complete Idiot’s Guide to Starting a Home-Based Business, and The Rational Guide to Building Small Business Credit. Follow Barbara on Twitter @BigIdeas4SB.


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