5 Risks to be Aware of that Will Hurt Your Finances
There are ups and downs in life, good times and bad, and everything in between. Unfortunately, some events can hurt your finances in a significant way and may even be beyond your control. What are some of these risks to be aware of and what can you control?
Health Issues
As we become older, there are more chances of having a serious health issue. What is not commonly thought of is that family members, such as spouses, elderly parents, and children can develop health issues, both physical and mental. We have a responsibility to take care of our family, and the time spent will take time away from our job or business, which will eventually lower our earnings. While you cannot control the health of others, you can take charge of your own health and that of your children by living a healthy lifestyle.
Addictions
Do not think that you are immune to addictions. Aside from alcohol, illegal drugs, and gambling addictions, there are other destructive addictions that will ruin your finances such as prescription drugs, video games, and pornography/sex. The statistics on who has these addictions, how they start, age groups, and the impact on your brain are alarming. Be aware of these addictions and do your best to stop them before they start.
Divorce
Aside from paying legal fees, there are statistics that show that divorced women experience a prolonged loss of earnings and lower standard of living after divorce, even though various studies show that approximately 70% of women initiate divorce. Surprisingly, statistics show that a man’s earnings increase significantly after divorce. Focus on a healthy marriage and your finances will be stronger, plus some studies show that divorce does not lead to a better life.
High Income then Low Income
Inconsistent income patterns can hurt your finances in multiple ways. The first is that if your income is very high in one year, then your spending will probably increase, and once your income drops, your spending will probably not drop as quickly, if at all. Second, if you have a very good year in your business and don’t set aside a reserve for taxes, then you won’t have the money to pay your tax bill, especially if your income is lower in the following year. I have seen this situation happen repeatedly.
Expense Creep
Expenses have a way of increasing faster than your income and are hard to lower once they do. A good rule is to increase your savings in the same proportion as your income, and do not incur additional debt. This way, it does not really matter what you spend, and yes, I really did say that, because mathematically it does not matter. It’s putting first things first.
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Before You Open Up A New Location
It’s not a crazy idea, but now may be the time to open another location. Before you do, here are a few things you should consider:
Do you still have capacity at your existing location?
It’s much, much easier and less expensive to utilize your existing location to increase your sales and profits then to look for a new location. If you still have plenty of capacity in your current location then the time is not right. If you the opposite is true or you are trending to be at full capacity soon, then the time may be right to look for a new location
Relocate or additional location?
A relocation is essentially just a move, however, if you are keeping your existing location then the task becomes more complex. An additional location is almost like running two separate businesses at the same time.
If an additional location then consider management and staffing
Who will manage your new location? If you answered that you will, then expect to burn yourself out in a short period of time. Strongly consider either hiring a manager for the new location or for your existing location, while you manage the new location.
What is your cash flow like?
If your cash flow is already tight, then figure out what the reason is before you magnify the problem. A larger location or additional location will only add to cash flow problems if you haven’t addressed this issue already.
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What Changes Will You Make?
Hopefully we don’t see a pandemic like COVID-19 in a long time or never see one again. Aside from practicing safety, there are many business changes that you are probably thinking of making and here are a few examples:
Work from Home More, but not too Much
Now that many of us have been forced to work from home more, you may want to continue the trend. Although, working at the office does have benefits, including less distractions from family members, a better work set-up than working in your bedroom, kitchen, or basement, being around co-workers, and the sense that you are now in work mode.
Work Better Hours
Maybe you were used to putting in 12 hour days and realize that there is more to life then working. After taking a breather, now may be the time to cut back those hours, but be careful that the hours do not creep back up over time.
Expand Your Business
There may be opportunities to expand your business in a low-risk way if your business is currently in a strong position. It can be possible to find a good location with reasonable rents, good employees to fill positions, and marketing may be more effective if your competition decides to sit tight.
Evaluate Your Current Business Model
Instead of bricks and mortar, you can transform your business to be either virtual, online, or delivery based. Many industries have changed and I believe that some of the virtual trends, including telemedicine, will continue to increase.
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A Few PPP Loan Forgiveness Tactics
You want to make sure that as much of your PPP loan is forgiven as possible. Here are a few ways you may not have thought of:
Non-Payroll Costs:
You can include interest payments on loans, the cost of telephone services, including your cell phone, faxes, VOIP services, and Internet services, fuel for your vehicles, and lease payments for any personal property, such as for vehicles and equipment as long as they were in force before 2/15/2020.
Payroll Costs
Payroll costs include wages, but also include group health care benefits, retirement plan contributions, and state and local payroll taxes.
Deadline
The application expires on October 31, 2020. Once the 8 week period is over do not hesitate to work on the application.
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PPP Loan Forgiveness Application
There is a forgiveness application that was made available from the Paycheck Protection Program and here are the highlights and definitions:
Average Full-Time Equivalent “FTE” Calculation:
To calculate FTE, you can use a simplified version to determine this by assigning a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.
Covered Period for Payroll Costs
The covered period is the eight-week (56 day) covered period of your PPP loan. The first day is the same date that you received the loan proceeds. For example, if loan proceeds were received on Monday, April 20, then the covered period is April 20th thru Sunday, June 14th.
Alternatively, eligible payroll costs can be calculated by using the eight-week (56 day) period that begins on the first day of the first pay period following the PPP loan disbursement date. For example, if you received your loan proceeds on Monday, April 20th and the first day of the first pay period following the PPP loan disbursement is Sunday, April 26th, then the first day is April 26th and the last day is Saturday, June 20th. This represents a 6 day difference from the first example.
Potential Forgiveness Amount
The potential forgiveness amount is the smaller of the PPP loan amount, 75% of your payroll costs, or the modified total calculation (which is the total of payroll costs, business mortgage interest, rent, and utility payments and then factors in wage reductions and FTE reductions).
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What Will Your Business Look Like and What Changes Can You Make?
Eventually things will open up fully and business activity will be flowing better than it is right now. What will your business look like and what are some changes you can make?
Technology
The use of virtual meeting technology has skyrocketed with apps like Zoom and Google Meet. This pandemic has forced businesses to be nimbler and integrate technology as an essential aspect of business operations. Other technologies that can and should be used include remote servers, cloud-based software, virtual phone systems, and electronic payment processing.
Time Management
Doesn’t the week seem like one big blur? Even though you can have a Zoom meeting with a client at 10:30 PM, doesn’t mean that you should. It is good to keep some structure in place as best as possible. This includes start times, stop times, meeting times, checking and responding to emails, and telephone calls.
Method of Delivery
If you sold products through retail, including restaurants, then now is the time to ramp up your online sales and distribution capabilities. It doesn’t mean that you need to abandon your store front, but online sales and distribution cannot be ignored. The same goes for providing services virtually to your clients. Delivering services online, such as therapy or professional services, has been widely accepted. Rethink if you need to open that second office or if you can be more virtual.
Financial Cushion
Having a financial cushion for your business and also personally is absolutely essential. The weaker businesses will struggle to be up and running quickly, while the stronger businesses can do so easier and may even be able to take advantages of expansion. How much should you set aside? A cushion of 3 months of expenses is a good minimum. It will take a while to do so, so start saving little by little until you get there.
Keep Healthy
There is a great temptation to eat more and exercise less, but this will catch up with you and rob you of your energy and clarity to make good decisions. Don’t ignore your health because it will have a direct impact on your business and ultimately on your finances.
There is so much that is unknown at this time, and it would be great to have all of the answers.
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PPP Loan Forgiveness
It sounds like it would be straightforward to have your PPP loan forgiven, but that’s like saying the tax code is straightforward. Here are details and confusion on loan forgiveness:
8 Week Period
Qualified expenses have to be paid or incurred during the 8 week period after receiving the loan. Is it incurred or paid? The statute is not clear.
75%/25%
At least 75% of loan proceeds need to be spent on payroll costs. The other 25% can be used for interest costs, rent, and utilities. It looks like rent of vehicles, etc. is considered rent also. What about bonuses, and do they count? Unclear also.
Full-Time Equivalent (FTE) Calculation
The definition of FTE is not in the statute. It is still not clear if the hours of part-timers should be combined to determined full-time equivalents.
Documentation Needed for Forgiveness
You will need to provide documentation verifying FTE’s, payroll tax filings, financial statements verifying payment of debt obligations, and any other documentation the Administrator determines necessary. What exactly does the last requirement mean? I would think that it means that you better have good bookkeeping.
Are you more confused? I am sure that more guidance will be issued, but hopefully very soon.
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What Should We Do?
With business closings, unemployment, restrictions, and people directly or indirectly impacted by the virus, what should we do? Here are some things we can do:
Don’t Make Drastic Changes
When possible, do not make significant, time-consuming, and cash-consuming changes. These are not normal times and no one knows how long this situation will last.
Adapt and Change
Many businesses have been adapting and changing their business models to accommodate COVID-19 restrictions. Can you do the same? Think of how you can modify your product or services to deliver them in a safe and different way. This is not always easy to do, but there are always possibilities.
Don’t Be Too Positive or Negative
Let’s not be foolishly optimistic about the situation because with each passing week or month that you expect things to change, your disappointment will keep on growing. However, do not be so negative to think that the world will never open back up.
Only Think About What You Can Control
If this pandemic has taught us one thing, it is that a lot in life is out of our control. What you can control are your reactions to others, actions you take, choice of words, reactions to your emotions, and the amount of news that you view. A formula that is probably true is More News = More Anxiety.
There is so much that is unknown at this time, and it would be great to have all of the answers.
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COVID-19 Updates: I Received my PPP Loan, Now What?
If you received your PPP loan, what should you do now?
The main purpose of the PPP loan is to keep your employees on payroll and the proceeds should be used for:
- Payroll costs, including payment of state and local taxes based upon compensation
- Group healthcare benefits and retirement
- Interest on mortgage obligations
- Rent
- Utilities (electricity, gas, water, telephone, or internet)
How to obtain forgiveness
- Your loan forgiveness will be reduced if you decrease your full-time employee headcount during the covered loan period.
- Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
- 75% of the proceeds must be used towards payroll costs
- The period to use the proceeds is the eight week period after receiving the loan
The act excludes from payroll costs the compensation of individual employees that make an annual salary of $100,000. Also, the whole point of this loan is to help pay your employees for two months plus other critical expenses during this time period.
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COVID-19 Tax and Financial Updates 04-17-2020
Tax Updates
- Some taxpayers have started to receive their Economic Impact Payments
- The CARES Act also provided retroactive tax law changes, such as allowing improvements to nonresidential buildings to be eligible for bonus depreciation (the ability to be expensed 100% in one year), while reducing the number of years of depreciation from 39 to 15 years
- Business losses from 2018, 2019, and 2020 are eligible to be carried back up to five years and losses carried to 2019 and 2020 can now offset 100% of taxable income versus 80% previously
Paycheck Protection Program Info
- The PPP loans have reached their maximum in less than two weeks, and now we have to wait to see if there will be an increase to the limitation.
- So far, not one client has informed me that they received funds from the PPP
Adapting to the Situation
- We hear stories from our clients and others who are making changes to their businesses to help adapt and survive through this financially. Some changes include:
- Virtually serving clients and customers, when possible
- Creating new services that are in demand now
- Selling products online versus traditional retail
- It also appears that there is a renewed sense of putting things in perspective, focusing on what is important, not living just to work, and a general sense of community. I like those changes.
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