So many businesses are in a potential cash crunch. If they aren’t in one now, they can see one coming in the next few months. The economy has come to a screeching halt. Businesses of all sizes are laying off or furloughing workers. Some companies are looking at across the board pay cuts. I have been working with clients on looking at different financial forecasts and cash flow scenarios. Now we have another new cash mechanism to consider.
In the United States, the Coronavirus Aid, Relief, Economic Security (CARES) act has been passed. I decided to take a look at this new 880-page legislation. The first nearly 100 pages focus on the Paycheck Protection Program (PPP). You might qualify for loans that may be forgiven if the borrowers maintain their payroll.
- A small business with less than 500 employees
- A 501(c)3 nonprofit with less than 500 employees
- An individual who operates as a sole proprietor or independent contractor
- An accommodation or food services company with less than 500 per location
How Does it Work?
- Calculate the average monthly payroll costs for the last 12 months up to the date of the loan.
- Exclude payroll amounts over $100,000 for higher-paid employees.
- Exclude payroll taxes.
- Take 2.5 of your monthly payroll and subtract the excluded amount, and you get your potential loan amount.
- Then, you can get a large amount of this loan forgiven. Add eight weeks of payroll, mortgage interest, lease rent, and utilities.
- You have to reduce payroll by a reduction of employees or any payroll greater than 25% from your last quarter.
For more information, also see the Coronavirus Emergency Loans Small Business Guide.
Why Does This Matter?
I talk so much about doing a forecast model for your business. I strongly suggest this. Lately, many business models are just simply not making sense and would require a significant expense reduction to survive. The expense reduction could be detrimental to your organization so much that it would be difficult to recover. If you don’t know your current financials to even calculate what you could get for the PPP loan, you should get with someone quickly to get this in order. Also, you need to forecast a potential reduction in revenue as most small businesses will feel something soon.