Business Planning Solutions: Maintaining Adequate Cash Flow for Closely-Held Businesses

The effects of the COVID-19 crisis brought an end to the longest run of economic expansion in US history, leaving many businesses searching for creative ways to maintain payroll and operations. A lot can be said for the assistance provided to businesses through recent legislation; however, the programs and provisions made available through legislation like the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, aren’t one-size-fits-all remedies, nor are they the only route for businesses to increase cash flow. We want to take a look at some business planning solutions that may be used in tandem or in lieu of the recent programs and provisions provided.

Renegotiating Long-Term Debt

For many businesses, debt considerations must be made not only for their existing long-term debt, but for any new loans taken out during the crisis as well. Be proactive in communicating with your preferred lender. Set a meeting with your bank to discuss lending options, such as wrapping existing loans into a consolidated loan, or requesting an increase in your line of credit for liquidity needs. For any new obligations, we encourage businesses, to any extent possible, to seek maximum flexibility in the terms. 

You may also discuss possible modifications for existing loan terms, such as lower interest rates, forgiveness options for accrued/unpaid interest and/or outstanding principal, maturity date extensions, or less rigid covenants. Additionally, appreciated property may be transferred to satisfy a portion of outstanding debt, which, depending on the property’s fair value and the amount of debt forgiveness, may lead to a gain from the deemed sale as well as cancellation of indebtedness income. 

It’s important to consult with your tax professional, as there are separate considerations when significant loan modifications are made, and for pass-through entity partner and shareholder income as well. And all modifications have an impact on net operating losses (NOLs), certain other tax credits, and the adjusted basis of a business’s property.

Renegotiating Leases

Review your contract obligations. This should, of course, be done regularly for risk mitigation purposes, but take a look with the intention of ensuring you are getting the best value possible on things like utilities, technology costs, and equipment leasing. And call on your vendors and suppliers. You may be able to renegotiate a better price. 

Modifications to leases for rented office space have additional considerations. The timing around both your deduction of rent and your landlord’s recognition of rent as gross income can create issues on the tax front. It’s important to discuss the tax implications and the reach of certain safe harbors that have been implemented to help keep tax avoidance rules from applying outside your business’s normal method of accounting.  

Adjusting Compensation

Employee Compensation – In times of uncertainty, it’s crucial to eliminate non-essential expenses, or discretionary spending. In a crisis, some companies immediately jump to cuts in labor or wages, but consider your entire personnel model carefully before making broad cuts. Sweeping cuts to employees, their pay, or their incentives affect their job performance and, ultimately, your success. And when reviewing incentive programs, employee benefit programs, and executive pay for possible adjustments, legal guidance should be sought prior to making said adjustments. 

Incentive CompensationConsider developing or modifying a referral program to further incentivise employees to bring on new clients and jobs. These programs can be based on future profits from gaining the referral as a client (or starting a new job for an existing client), so they won’t result in the same impact to existing cash flow that other incentive programs may bring about. 

Reviewing Internal Systems and Processes

In times of economic challenge, business owners need to take a hard look at their company’s operations and procedures. Review these areas for missed opportunities that increase efficiency. 

Accounts ReceivableStay on top of your accounts receivable. It is best practice to review aging summary reports, at least weekly, to take corrective or preventive action when necessary.

Inventory – Consider your inventory on hand. Staying liquid may require your business to return excess materials to suppliers. As the economic effects of the crisis continue to actualize and forecasts remain uncertain, businesses should maintain a minimum level of inventory. In light of these effects, updating inventory costs is essential to ensure prices are still in line to maintain profitable margins. 

Consider discounting excess inventory, implementing buy-one, get-one sales on certain products, or providing bulk-purchase or early pay-off discounts. Not only will these discounts assist you with clearing out inventory, but they also provide opportunities to attract new business, keep current clients coming back, and to improve your financial standing. 

SoftwareWhile eliminating discretionary spending is advised, there is certainly an art to balancing investments when your business has sufficient cash on hand. Depending on your available funds, weigh the implementation cost with the projected time savings and revenue increases experienced through using automation and efficiency-promoting software, such as inventory and project management, or customer relationship management programs.

Considerations for Tax Returns

Bad Debt – Businesses can claim a business bad debt deduction on uncollected amounts, such as sales, services, rents, and interest, that were previously included in gross income. Consult with your tax professional to ensure you understand the appropriate method to claim the highest possible deduction for business bad debt, as well as the intricacies of showing reasonable efforts to collect, when you are allowed to file a claim, and the tax implications.

Gift & Estate Planning – Property may be gifted to a trust for the benefit of the family of a business owner, which may be advantageous in a healthy economy. If the transfer occurred before the economy began its descent, and if the business owner retained certain non-fiduciary rights, they may consider weighing their options for reacquiring said property. Consult with your tax professional to discuss your options. 

Additional Resources

Preparing projections and cash flow forecasts, and periodically measuring them against your actual cash flow, will help you keep a close watch on your financial standing. ARB has created a 13-Week Cash Flow Analysis Worksheet, designed specifically to target the liquidity needs of small businesses and assist them with projecting cash flow, forecasting for deficits, managing shortfalls, assessing working capital and liquidity needs, and determining their ability and need to borrow. 

Contact ARB

The ARB Closely Held Businesses Service Group is committed to helping closely held businesses through their unique accounting, tax, planning, and compliance needs. Contact us today to get started. Please visit our COVID-19 Financial Resource and Tax Center for additional information on related tax and financial matters.

 

by David Jean, CPA, CCIFP, CExP