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How to improve business cash flow

June 15th, 2020

WalletHub’s 2019 small business survey found that cash flow was one of the biggest sources of frustration for owners. Many owners believe that cash flow is more important than profit because no firm can operate without sufficient cash inflows.

This article explains the factors you must consider to create a cash flow rollfoward. A rollforward is the most effective tool to analyze your cash needs and to determine if you need a line of credit.

As an example throughout, meet Jane, the owner of Prestige Furniture. Prestige manufactures high-end furniture for wealthy homeowners. Prestige’s business is heavily dependent on home construction and remodeling projects. Customers buy furniture when they design or remodel space in the home.

The COVID-19 pandemic halted most home construction and remodeling projects for months, and the industry is slowing starting back up. During the shutdown, Prestige’s revenue declined by 90%, and the company used most of its cash reserves to pay fixed costs during the period.

Business is starting to recover, and Jane needs a plan to compute her cash needs, and determine if she needs to open a line of credit. Here are the key factors that Jane must consider to project her cash inflows and outflows.

What is your sales cycle?

The length of your sales cycle has a big impact on how quickly you collect cash from sales.

Here is how TrackMaven defines the sales cycle: “It encompasses all activities associated with closing a sale. Many companies have different steps and activities in their sales cycle, depending on how they define it.”

A sales cycle depends on the complexity of the product, and the cost. If you sell sporting goods, for example, the sales cycle for a $70 baseball bats is different than the cycle for a $4,000 road bike.

Prestige’s sales cycle averages three months. The sales cycle starts when an interested customer contacts Prestige, or when a salesperson closes a sale. The company determines what the customer needs, builds and ships the furniture, and waits for payment.

When Jane plans her cash needs, she must consider the sales cycle. If Prestige receives $100,000 in orders during the 1st week of June, the cash for the sales won’t be received for three months, on average.

Many firms do a poor job of forecasting expected cash flows, and these companies struggle to operate.

Cash flow forecasting

To create an accurate cash flow forecast, Jane must also consider these factors:

  • Accounts receivable: The dollar amount of credit sales that are not collected in cash, and the average amount of time it takes to collect the receivables in cash.
  • Inventory: The dollar amount of inventory needed to fill customer orders over the next several months.
  • Debt payments: Interest payments, and any repayments of principal due in the next few months.

These factors help to determine the amount of cash required to operate. Successful businesses closely monitor accounts receivable and enforce a formal collection policy.

Monitor accounts receivable

Your accounting software should provide an aging schedule for accounts receivable, which groups your receivables based on when the invoice was issued. You should monitor this report and implement a collections process to email and possibly call clients to ask for payment.

Other strategies to increase cash collections

Here are some tools you can use to monitor your cash balance:

  • Don’t wait to reconcile the bank account: Reconcile your bank account within a few days of downloading your bank statement. The reconciled bank balance is your starting point for cash, and you can’t generate an accurate cash flow statement without the balance.
  • Budget: Create a budget before the start of each year, and compare your actual results to your budget each month. The budget will help you understand how much cash you need to operate each month. Say, for example, that you make a product with a total cost of $100, and that you project sales of 2,000 units a month. You need $200,000 to cover your cost of production. If your sales grow 10%, you’ll need 10% more cash to operate.
  • Offer discounts: Offer your clients a discount (1% to 2%), if they pay within 10 days. You’ll lose some revenue, but you’ll collect some cash faster- and that will make it easier to operate.

These are the steps required to collect cash inflows so you can operate your business. So, where do you go from here?

What to do next

Gather all of the details using the strategies above, and create a cash flow rollforward by month. Here is the formula for the rollforward:

(Beginning cash balance) + (cash inflows) – (cash outflows) = (ending cash balance)

The ending cash balance for June is the beginning cash balance for July. Create a monthly cash rollforward, and update the rollforward each month. You’ll know how much cash inflow to expect, and you can decide if you need to borrow funds to operate.


Important PPP Information:

June 3rd, 2020

Two Main Criteria for PPP Loan Forgiveness

1.  The loan is used to cover forgivable expenses

Few changes from Treasury on 05/27/2020:

  • The cover period is extended from 8 weeks to 24 weeks, or 12/31/2020.
  • Reduces the payroll cost from 75% to 60% spent on payroll:
    • Wages up to $100K per employee

Gross Payroll Cost = $16,666.67 cap ($10,000/12) x 2months

Calculation of FTE:

Using 8-week average FTE between this period proportionally before the lock-down:

02/15/2019 to 06/30/2019

01/01/2020 to 02/29/2020

    • Continued group healthcare benefits; includes Medical Premium, excludes employee withholdings
    • Payout accrued vacation
    • Employer State and local payroll taxes; excludes federal taxes
    • Retirement plan funding costs; excludes employee withholdings
  • An increase from 25% to 40% spent on:
    • Mortgage interest
    • Lease payments: office space, personal equipment such as cars, printers, and copiers
    • Utility payments: electricity, gas, water, transportation, telephone, or internet
  • Increase in loan repayment term from 2 years to 5 years.
  • Increase in the deadline to rehire employees from June 30 to December 31.


2.  The loan is used during the covered period

  • Expenses incurred or paid in the twenty-four weeks, or 12/31/20 following disbursement.
  • The covered period begins the same day as the loan disbursement date. Example: if you received the funds on April 15, the twenty-four weeks period starts from April 15.
  • Optional: Alternative Payroll Covered Period begins the first day of the next pay period following loan disbursement.

Note: Loan forgiveness is not taxable, and expenses are not taxable.

Cash or Accrual: Forgivable amount is calculated using both

  • Allows costs paid during the twenty-four-week eligible period
  • Allows costs incurred during the twenty-four-week eligible period, so long as they are paid in the normal billing or pay period cycle
  • A cost that is both paid and incurred in the eligible period is only counted once


Three Ways PPP Loan Forgiveness Can be Reduced


1.  The number of FTEs are reduced and not restored by December 31

  • Reduction in FTE count proportionally reduces the loan forgiveness amount:
    • FTE count during the eight-week period is compared to your choice of reference period:
      1. Feb 15 – June 30, 2019
      2. Jan 1 – Feb 15, 2020
      3. For seasonal employers, any consecutive 12-week period between May 1 – Sept 15, 2019
    • Safe Harbor calculation allows restoration of FTE count to Feb 15 level by June 30
  • FTEs are calculated based on a 40-hour workweek:
    • Full-time employees (work at least 40 hours) are considered 1 FTE
    • Part-time employees (work less than 40 hours) can be counted in 2 ways:
      1. Simple Method: each part-time employee counts as 0.5 FTE
      2. Each employee’s average number of hours worked per week is divided by 40 (to one decimal point). E.g. 12 hours per week is 0.3 FTE
  • Employees who were fired for cause, resigned, or requested to reduce their hours will not reduce loan forgiveness


2.  Employee compensation is reduced by more than 25% and not restored by December 31

  • Compensation reductions over 25% will be directly subtracted from the loan amount eligible for forgiveness
  • A safe harbor exists for wages reduced but restored by Dec 31 (see page 7 of the Loan Forgiveness Application for the multi-step calculation)
  • Compensation may be reduced for employees who make more than $100,000 per year without affecting forgiveness


3.  Spending on non-forgivable costs

  • Amounts spent on other debt services, EIDL refinancing, or other allowed, but non-forgivable costs will convert to a loan at 1% interest with a two-year term


Tax Implications of the CARES Act

  • PPP loan forgiveness is not taxable, but related expenses that were paid with PPP funds are currently nondeductible
  • Tax due date extended to July 15 – delays payment and 1st and 2nd quarter estimates.
  • Employee Retention Tax Credit – refundable up to $5,000 per employee (not eligible if you have PPP)
  • Employer-provided educational assistance – may pay up to $5,250 of employee’s student loan which is tax-free to the employee before 01/01/2021.
  • $300 above the line deduction for charitable contributions (allow those that do not itemize to deduct) – beginning in 2020 and no provision to sunset.
  • Deferral of employer-paid social security taxes – not eligible if a business receives loan forgiveness under PPP – last resort
  • Net Operating Losses (NOL) Losses beginning after 12/31/17 and before 01/01/2021 may be carried back to 5 years – previously you could only carry forward.
  • The retirement plan required minimum distribution is waived for 2020.


Applying for PPP Loan Forgiveness

Call your accountant or follow these steps to do it yourself:

  • Read the Paycheck Protection Program Loan Forgiveness Application twice
  • Gather the documents listed on page 10
  • Complete the PPP Schedule A Worksheet and reduction/Safe Harbor calculations on pages 7, 8, and 9
  • Complete PPP Schedule A on page 6
  • Complete the PPP Loan Forgiveness Calculation Form on page 3
  • Double-check your calculations and certify page 4 before submitting to your bank


Run the numbers and use the options that provide the greatest loan forgiveness to your organization.

Choices available in application calculations:

  • Whether to use the simple method for calculating total FTEs
  • Choose the method that gives you a comparably higher ending FTE count
  • The reference period for calculating prior FTEs
  • Choose the period that gives you the lowest beginning FTE count
  • The date you apply for loan forgiveness
  • If using Safe Harbor options, wait until after June 30 to apply for forgiveness
  • Using the Alternative Payroll Covered Period (if allowed) or no


Fraud – Questions included in Interim Final Role

What happens if PPP loan funds are misused?

If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liabilities such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.


PPP Loan Forgiveness May Still Evolve

  • SBA released the PPP Loan Forgiveness Application on May 15 (though it is dated May 20)
  • SBA released an Interim Final Rule on April 15.
  • SBA released Interim Final Rule on Loan Forgiveness on May 22
  • Treasury has continued to update FAQs, most recent May 27
  • Good-faith certifications of need are taken at face-value for loans under $2MM
  • Advocacy efforts for additional guidance and updates have continued
  • Your lending institution is responsible for approving your loan forgiveness
  • Ask your lending institution for clarification on calculation questions and confirm they support your approach to calculating loan forgiveness


Questions We Still Need Answers To…

  • What will my bank require for forgiveness?
  • All loans over $2 million will be reviewed. What will the review entail?
  • Will my expenses be deductible? Will Congress overrule the IRS?
  • How PPP loans interface with existing federal contracts.
  • SBA staff confirmed for AICPA that PPP loans will not be subject to single audit requirements.

PPP Application Form



The CFO Role in 2020:

May 11th, 2020

The coronavirus pandemic has raised the stakes for business owners. Owners must quickly respond to change, and make difficult decisions to keep their business operating. The CFO plays a key role in the decision-making process on a daily basis.

CFOs manage the accounting and finance operations within a business and generate financial statements. However, today’s CFOs must have these skills:

  • Analytics:  CFOs must shift through data and find the information that is most important for decision-makers.
  • Planning:  Senior management relies on the CFO to create a plan when the company faces a business threat, such as higher competition, or a change in customer preferences.
  • Communication:  Effective CFOs are great communicators. They can educate the workforce, and give the staff confidence in management’s plans. People need to know where a company is headed, and the CFO can deliver that message.

The biggest pandemic issue for many firms is cash flow, and it is critical that CFOs are analyzing cash inflows and outflows on a weekly basis. If you pay close attention to cash management, you can pivot your business to increase sales and profits.

This approach allows a business to be proactive, and to address problems quickly. Work with a CFO who can help you make better decisions in less time.