Small business owners, self-employed workers and freelancers received some welcome news when Congress recently passed the Paycheck Protection Flexibility Act. This new law clarifies how businesses can qualify to have all or a portion of its Paycheck Protection Program (PPP) loan forgiven.
Here is what you need to know:
December 31, 2020 is the new deadline to spend loan proceeds. When the PPP program was rolled out this spring, businesses were given 8 weeks after loan funding to use the loan’s proceeds if they wanted to qualify for loan forgiveness. That timeline has now moved to 24 weeks. Due to the extended stay-at-home orders and further assessment of the pandemic, the new deadline is now effectively December 31, 2020.
More loan proceeds can be used for non-payroll expenses. The original law required 75% of loan proceeds to be spent on payroll. For businesses with high cost of goods sold or who had trouble convincing furloughed workers to return to work, hitting this 75% threshold was problematic. The new law reduces the amount of loan proceeds required to be spent on payroll to 60%.
More flexibility in fully restoring workforce. Borrowers now have through December 31, 2020 to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. There are three exceptions allowed for not having a fully-restored workforce by Dec. 31. Borrowers can adjust their loan forgiveness calculations because of:
Employees who turned down good faith offers to be re-hired at the same hours and wages as before the pandemic;
Difficulty finding qualified employees;
COVID-19 related operating restrictions
Loan terms extended. For loans that do not qualify for forgiveness, borrowers now have up to five years to repay the loan instead of two. The interest rate remains at 1%. Since your bank has 60 days to process your loan forgiveness application and the SBA has 90 days to process the request, your initial payment is now effectively five to six months after your forgiveness application.
What you need to do
Download EZ Application Form. If you are a self-employed worker, independent contractor or sole proprietor who has no employees, you may be eligible to use the EZ Loan Forgiveness Application. Click here to download the EZ form. Click here to download instructions for the EZ form.
Download Regular Application Form. If you aren’t eligible to use the EZ Loan Forgiveness Application, then you’ll need to complete the regular loan forgiveness application. Click here to download the regular application.
Stay in contact with your lending institution about when and how to complete the loan forgiveness application.
Consider reaching out to your legislators to let your voice be heard on how you were impacted and to share your story on your PPP loan experience as several U.S. Senators indicated that there will be more changes in the future regarding the program.
When tracking and planning your business objectives, it’s easy to focus your analysis on two reports — the income statement and balance sheet. But one of the primary keys to your business’s success relies more on how you handle the money flowing in and out of the business. The appearance of a solid profit can hide a lurking cash flow problem.
Here are practices to help you give your cash flow the attention it deserves:
Understand your cash position. Start with simply getting in the habit of monitoring your bank account activity daily to watch for mistakes or unforeseen charges. Then look at each business process that involves cash — purchasing, inventory, collections and payroll are good examples. Consider extending terms for paying vendors, establishing shorter terms for customers to pay and implementing a review process to ensure accurate payroll calculations. Also explore opportunities to turn over your inventory faster.
Create a cash flow statement forecast. With your knowledge of cash, create a forward-looking statement of monthly cash flow. It will reflect the ebbs and flow of cash throughout the year and identify times of cash crunch. You can then see the impact of changes you are making on your company’s cash position.
Identify relevant ratios. There are many helpful cash flow ratios. Identify ratios that are especially helpful to your business. Have debt? Consider the cash flow coverage ratio (operating cash flow ÷ by debt) to help plan for scheduled debt payments. Making a lot of capital purchases? Use the free cash flow calculation (operating cash flow – capital expenditures) to determine how much cash will be left over after the purchases.
Build in some contingencies. Most businesses experience seasonality. Understanding your business cycles can help you strategically manage cash in high cash months to cover shortfalls that come in low cash months. Set up a line of credit so it’s available in the case of an emergency, or as a bridge during short-term liquidity needs. A line of credit only charges interest only when used, so it’s a perfect tool to have at your disposal.
Watch for hidden cash hijackers. Oftentimes, large cash expenditures can be hidden on your income statement or balance sheet. A few examples are payments on capital purchases, debt obligations, dividends, guaranteed payments to partners and taxes. Income taxes, when not accounted for correctly, can cause a twofold problem — a large lump sum that is due in a short amount of time, plus a larger obligation to account for going forward. Don’t wait until the end of the year to project your tax provision.
Appoint someone to manage cash. As with many business processes, important details can fall through the cracks if there is not clear accountability as to who is responsible for the task. So assign yourself or someone you trust to manage the company’s cash flow.
When businesses fail, it’s usually because they run out of money. By making cash flow a central part of your business plan, you greatly reduce this risk.
According to the Association of Certified Fraud Examiners, nearly 30 percent of businesses are victims of payroll malfeasance, with small businesses twice as likely to be affected as large businesses. Here are four scary payroll fraud schemes you need to know:
Ghost employees. A ghost employee does not exist anywhere except in your payroll system. Typically, someone with access to your payroll creates a fake employee and assigns direct deposit information to a dummy account so they can secretly transfer the money into their own bank account.
Time thieves. Time stealing happens when employees add more time to their timecard than they actually worked. Sometimes multiple employees will team up to clock each other in earlier than when they arrive or later than when they depart for the day.
Shape-shifting commissions. In an attempt to bump up a commission payment or attain a quota, sneaky sales employees may alter a sales contract to their benefit. A typical tactic used by a dishonest salesperson is to make a booked sale appear larger than it is and then slide a credit memo through the system in a later period. Companies with complicated commission calculations or weak controls in this area are the most vulnerable.
External swindlers. A popular scam, known as phishing, starts with a fraudster impersonating a company executive through email or over the phone asking an employee with access to payroll data to wire money or provide sensitive information. These imposters can make the correspondence look very real by using company logos, signatures and email addresses.
Tips to combat payroll fraud
Being aware of the threats is a start, but you also need to know how to stop them. Here are some tips to reduce your company’s payroll fraud risk:
Better internal controls. While most employees are trustworthy, giving too much control over your payroll to one person is not a good idea. Separating payroll duties and formalizing an approval process protects both your business and your employees.
Review payroll records. Designate someone outside of the payroll-processing department to periodically review the payroll records. Have them review names, pay rates and verify that the total payroll matches what was withdrawn from the business bank account.
Perform random internal audits. During an internal audit is when you can really get into the details to look for potential payroll fraud. You can do an in-depth review of the whole payroll system or select a random sample of dates and employees. Keep the timing of the audit under wraps to prevent giving someone the chance to cover up their misdeeds.
Managing your business payroll is a daunting task by itself, and actively protecting against fraud adds additional complexity.
Once again, this past year has brought us a series of complex legislative changes that affect the way business owners operate, from the Affordable Care Act to proposed changes to overtime laws that may have a direct impact on how millions of employees are compensated and classified.
With the enormous responsibility business owner’s bear in today’s economic climate, keeping up to date with and adhering to complex tax and compliance regulations can be difficult. To help ensure you are taking the right steps to minimize the risk you face as a small business owner, our firm partners with ADP®. Our local ADP sales representative works very closely with our firm and our small business clients to implement tools that can help them better manage their cash flow, attract and retain employees, and minimize overall risk.
If you are interested in any of ADP’s services, please contact either myself or our ADP sales representative directly. Their contact information can be found below: