Q&A talks with Michael Sabol, co-founder of Glastonbury CPA firm MahoneySabol, about the Paycheck Protection Program and ways businesses should manage their capital amid the economic downturn caused by the coronavirus pandemic.
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Q&A talks with Michael Sabol, co-founder of Glastonbury CPA firm MahoneySabol, about the Paycheck Protection Program and ways businesses should manage their capital amid the economic downturn caused by the coronavirus pandemic.
Q. How successful has the Paycheck Protection Program been in terms of addressing the capital needs of small and midsize businesses during this time of crisis? How did your clients respond to the program?
A. The Paycheck Protection Program has been successful in its purpose of ‘protecting paychecks,’ but has not necessarily addressed the ‘capital crunch.’
To maximize the forgiveness features, the funds need to be used predominantly for payroll, with remaining amounts for rent, utilities, mortgages and interest expense.
Therefore, a nonessential company, shut down and earning no revenues or profits, may keep and pay their employees but will be no further ahead financially to shore up their capital.
The response from our client base to the PPP program has been overwhelming. I do not have an exact figure of how many clients have applied, but a rough estimate would be in excess of 80% of our corporate client base.
Q. Is it wise, given the uncertainty, for companies to be taking on debt right now?
A. Debt is an interesting tool. Used properly, it can propel a business through its leverage.
However, if used to fund mismanagement and/or lack of profitability (excluding startup companies), it can be destructive.
If you have been a profitable company and need debt to get through this pandemic, then the low interest rates and availability of funds would warrant keeping the company afloat.
Q. Beyond accessing new capital, what else are you advising clients to do in order to manage cash flow right now?
A. As the saying goes, ‘cash is king.’ We are advising our clients to eliminate any waste, negotiate the abatement and/or deferral of rents with their landlords, defer principal payments to their banks and other financing partners, and stretch out their accounts payable.
If our nation is lucky and can resume some sort of ‘normalcy’ within the next three months, these tools can keep companies running until revenues and profits return.
The longer-term advice, which has not changed but needs to be strongly emphasized, is for companies to shore up balance sheets going forward so they are on solid footing to endure future economic slowdowns that will continue to occur.
Q. A lot of local, state and federal tax deadlines have been moved and some tax rules have been relaxed. What’s the net impact on businesses and how should they plan tax liabilities and payments for the rest of 2020?
A. There have been myriad changes intended to provide cash flow relief to individuals and employers via tax credits and payment deferrals in addition to grants and forgivable loans, all of which are welcome.
However, they have added confusion to the market around which programs can be utilized or possibly combined.
For example, if you participate in the PPP forgivable loan program you will not be able to utilize certain other credits and deferrals. As noted above, this is a slippery slope as a payment deferral is essentially another debt vehicle that, if not managed properly, can lead to bigger problems.
This will require a strong discipline to plan for the eventual payment of sales, payroll and income taxes.
The focus needs to be on short-term and long-term operational profits to navigate through the disruption. Should cash required for these items somehow vanish over the next few months, then you have merely kicked the can down the road and the road may be a dead end.
There are also changes to various tax provisions including rules for net operating losses and depreciation that can open up opportunities to recover taxes previously paid.
Businesses should review these to maximize any benefits available.
Q. There have been many moves by the federal and state governments to provide liquidity, low interest rates, grants as well as enhanced unemployment benefits. Will these moves provide the necessary resources to keep businesses running into late 2020 and into 2021, when the effects of this crisis may hit hardest?
A. The economic growth and prosperity over the last few years has strengthened company balance sheets across the nation. This strength together with the efforts by the federal and state governments, provide the ability for companies, as a whole, to sustain this crisis for several months.
However, looking longer term, even if some sort of normalcy occurs by June or July 2020, many industries — leisure and hospitality, restaurants, as well as private and higher education — face a slow ramp up or uncertainty, making it likely this crisis will continue through mid-2021.
This time period will be trying for many businesses and without further assistance, many companies will struggle to succeed. Firms must plan now for today and the future.
