The United States and the worldwide economy has been significantly disrupted in the past couple of months by the coronavirus (COVID-19) pandemic. As states and localities “shelter in place” or “hunker down”, businesses have not faced such a disrupting event in decades.
While the tourism, travel and hospitality industries are suffering the worst, the construction industry is also feeling the effects. While some states, like Kentucky, have deemed construction an essential service, other areas of the country, like Boston, have stopped projects and shut down all but emergency construction work. Even where construction activity continues, it continues under increasing pressures and risks, such as:
- Owners delaying or cancelling projects
- Owners facing financial or cash flow issues, resulting in slow pay of billings
- Lack of access to labor, due to employees staying home and social distancing rules
- Supply chain issues.
Ken Simonson, the chief economist at The Associated General Contractors of America (AGC), expects that construction will be less affected than other industries in the short term, but there could be a longer lasting impact as it will take individuals, businesses and governments longer to commit to new construction once the pandemic recedes, as compared to other types of expenditures. It may also take significant time for individuals and businesses to recover from the cash flow interruptions during the pandemic, and during such time they will likely be unwilling to take on major construction projects.
In the face of such disruption, maintaining cash flow is of the highest importance.
There are four main areas your company should focus on:
1. Cash flow projections
Cash flow forecasts and projections will help management make key decisions during this period of uncertainty. Cash flow projections by job (even if just for the major jobs) can be a critical part of identifying where your company can run into problems and also identifying contracts that can help. Pay particular attention to bonded jobs, as these present additional risks should cash flow problems arise.
2. Maintaining normal cash flow process
The following processes that were previously best practices are now essential to maintaining a healthy company:
- Ensure project managers are billing on time, every time – a key element for making sure customers pay as promptly as possible is making sure they get timely billings that cover all of the work that can be billed. Where jobs can be overbilled, these overbillings may be able to help in the short term.
- Accounts receivable – make sure that bills are paid timely by customers. If necessary, assign a person to identify accounts receivable balances that need attention or follow up to make sure people responsible for collection are held accountable. If problems arise on billings, make sure you are proactive in protecting your rights by notifying customers of the delinquent amounts and, if necessary, filing liens.
- Accounts payable – through the use of the cash flow forecast, vendor balances can be prioritized and paid when funds are available. Keeping cash in the bank to get the Company through this disruption is likely to be more important in the short term than a vendor’s early payment discount. Also consider whether vendor balances can be paid with a credit card, thereby, extending the time the cash leaves your bank account by up to 30 days. Also, check to see if vendors will allow extended terms.
- Payroll – consider what payroll payments are a priority and what payments could be cut back or deferred. For example, payroll taxes should continue to be paid timely to prevent fines and penalties. However, items such as employer 401(k) contributions, bonuses, and elements of owner compensation/distributions could potentially be deferred or reduced. If necessary, consider head count and whether layoffs and/or furloughs may be necessary (the cash flow forecast and analysis of the government programs below will be essential to making such tough decisions).
3. Banking and financing
Proactively work with your bank to make sure you have the financing you need to get through the periods when cash flow will be at its worst. Also, if you have debt with the bank, discuss how payments could be restructured to defer payments or potentially make payments of interest only.
4. Government programs
The Federal and State governments have been fast tracking legislation to help businesses and individuals. In many states, for example, access to unemployment benefits have been expanded. At the Federal level, on March 18, 2020, the Families First Coronavirus Response Act (Families First Act) was signed into law and on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act followed.
The Families First Act includes:
- Provides a new type of covered public health emergency leave for eligible employees of employers with fewer than 500 employees.
- Requires employers with fewer than 500 employees to provide up to two weeks of paid sick leave to all employees for certain covered purposes related to the coronavirus outbreak.
- Establishes refundable payroll tax credits to cover the cost of wages paid to employees under the public health emergency leave and emergency paid sick leave programs.
The CARES Act includes:
- The Paycheck Protection Program (PPP), which is an emergency loan program based on the Small Business Administration’s (SBA) long standing 7(a) loan process. The program enables entities with 500 or fewer employees to borrow funds through an SBA lender to pay staff, mortgage interest, rent and utilities for an 8-week period with the possibility of the loans being forgiven in whole or in part. Businesses in certain industries can have more than 500 employees and still qualify for PPP loans if they meet applicable SBA employee-based size standards for those industries.
- A Mid-Size Loan Program for entities with between 500 and 10,000 employees. More details are expected to be forth-coming on this program.
- Refundable payroll tax credits available to some employers whose operations have been fully or partially suspended due government COVID-19 shutdowns or that have had a significant decline in gross receipts when compared to the same calendar quarter in the prior year. The credits are equal to 50% of an employee’s qualified wages up to $10,000 for all quarters (resulting in a maximum credit of $5,000 per employee).
- The ability for employers to defer payment of the employer share of Social Security taxes payable for all periods through 12/31/2020. These deferrals must be paid in 2 installments: 50% by 12/31/2021 and 50% by 12/31/2022.
While owners and senior management are juggling many balls right now with job sites being disrupted, offices closed or working with skeleton “essential” staff, strains on IT infrastructure with so many people working from home, etc. it’s important to remember that your Dean Dorton team can help provide advice and assistance. For example, if you would like to know more about the recently enacted State or Federal legislation (such as the Families First and CARES Acts), or how we can help with cash flow projections, your operations or back office processes through these trying times, please contact your Dean Dorton advisor or I would be happy to discuss your unique situation with you.
For more information about how the Coronavirus is effecting businesses across all industries, visit our COVID-19 Resource page.