Using a 13-Week Cash Flow Forecast in Today’s COVID-19 Environment

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By Jennifer Mailhes, Managing Director, Doeren Mayhew Capital Advisors

Business disruptions like the current COVID-19 pandemic can happen at any given moment, and an immediate concern that often arises for business owners is how to continue to properly manage their cash flow during these uncertain times.

When a company is experiencing a period of uncertainty, they should consider using a 13-week cash flow forecast as a helpful tool. It can be used to help determine where to cut costs, develop ways to plan around challenges, help understand the impact of delayed collections and continued costs, and much more. It also provides business owners with a tool to modify their plans as things change.

Additionally, this type of planning gives your lenders confidence in your ability to plan and manage through a situation with a great deal of uncertainty. Typically, in times of covenant violations or default, lenders will require a 13-week cash flow, at least a two-year forecast, and additional reporting driven by the business and current situation. By sharing this information proactively with your lenders although not yet in default, it not only helps build your relationship, but also demonstrates that your management team can handle it.

With the recently passed Coronavirus Aid, Relief and Economic Security Act (CARES Act), organizations should also consider some of the benefits included when developing a 13-week or longer-term cash flow forecast.

Doeren Mayhew’s advisors outline a few key uncommon areas to consider in today’s environment:

  1. Federal income tax payments. Although federal income tax payments have been extended, consider how this impacts your cash flow in the near and long term. For example, you may have the cash surplus to get through May. Quarter two of 2020 tax payments are due in June and quarter one tax payments for 2020 and any amounts due from 2019 are due in July.
  2. Paycheck Protection Program (PPP). Many small business owners are eager to take advantage of this financial assistance because it will provide them with immediate relief. Qualifying businesses will be able to use this loan to assist with areas such as payroll costs, mortgage interest, rent, certain utility payments and more, all of which have a significant impact on cash flow. Plus, the entire loan, or a substantial portion of it, is eligible to be forgiven. The forgiveness portion of this program is strongly impacted by the decisions employers make on retaining employees or adjusting pay.
  3. Payroll tax payments. To address cash flow concerns, the law provides federal payroll tax deferment of employer’s portion of FICA due from March 27, 2020, until Dec. 31, 2020, with half due Dec. 31, 2021 and the other half due Dec. 31, 2022. There is also an Employee Retention Tax Credit of up to $5,000 per employee, but eligibility is limited to situations of a full or partial shutdown. Keep in mind, that this payroll tax deferral and credit cannot be applied if your organization takes advantage of the PPP.
  4. Net operating losses (NOL). The act repeals the 80% income limitation for NOL carryovers that can be deducted for the taxable years beginning before Jan. 1, 2021. However, the 80% limitation remains in place for taxable years beginning after Dec. 31, 2020. Previously, NOL’s were only allowed to be carried forward, but now they can be carried back five years. We encourage you to work with your tax advisor to amend or modify tax returns to take advantage of the carryback if it makes sense for your business.

To help you get started, here’s an example of a 13-week cash flow forecast we often use with clients. However, it’s important that you work with your advisor in developing this model to evaluate how the CARES Act and other economic factors may impact your forecast.

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Our cross-disciplined team of business advisors and tax professionals specialize in working closely with business owners to develop a 13-week cash flow forecast to help them make more informed decisions on next steps to take during challenging times like these. To learn more or obtain assistance, contact us today.