Three months ago, the future looked very bright. Then Covid-19 happened. This has spawned the biggest unemployment since the great depression of the 30’s. Are your practice and clients ready to take on the post Covid-19 future? An essential part of preparing for the impending recession is to do a risk analysis. A risk analysis grades different likely and relevant external disaster scenarios and proposes mitigations.
Each disaster scenario is rated in two different dimensions: likeliness and impact. Each dimension uses a scale from 1 to 5. A score of 1 equates to “not likely” or ”no impact.” The other side of the spectrum, a score of 5, represents “very likely” or “great impact.” After assigning a score to likeliness and impact to each risk, the two scores are multiplied. A score of 12 or above indicates that the risk is high and that immediate attention is required.
Some of these disaster scenarios that will be addressed are: COVID-19 second wave hits. The IRS audits your clients. Clients do not get PPP Loan Forgiveness. These risk scenarios are presented together with mitigation suggestions below.
Risk 1: Clients do not Get PPP Loan Forgiveness
- Probability: 3
- Impact: 4
- Risk: 12
Not getting PPP loan forgiveness may put your client in severe financial strain. Worse case scenario, your client goes out of business.
If a company has an average payroll of $10,000 per month, they can loan $25,000 under the PPP. With an interest of 1%, that has grown to $25,125 after the first 6 months of no payment. If they don't get forgiveness, the loan has to be repaid in 18 months. In this example it is $1,407 per month. This means that their original average payroll has increased with +14.1%.
So in this scenario the business got the loan, spent the money on payroll and didn't get forgiveness. Very few businesses will be able handle such a large increase of expenses.
But even if your clients remain in business, their financial stress may lead them to lose trust in their accounting partner and blame them for their situation. Whether this is fair or not, this may end up in an agreement termination.
Help your clients get full forgiveness. To do so, consider doing the following:
Explaining to your client why it is important to set up systems and procedures that support the requisites outlined to qualify for full forgiveness
Set up those procedures and help your clients remain accountable
Take advantage of technology. There are tools that can help you project loan forgiveness amounts and if your clients need to make corrections in how they are handling their expenses. When evaluating a support tool, take into account the following criteria: The calculations include FTE & ability to add expenses other than payroll to the calculations
Risk 2: Failing the Government Audit
Over 2MM in Loan:
- Likeliness: 5
- Impact: 3-5
- Risk: 15-25
Less < 2mm in Loan:
- Likeliness: 1
- Impact: 3-5
- Risk: 3-5
The government will be auditing businesses that have borrowed over 2 MM. The SBA has just released the guidelines for loan forgiveness. This includes retaining all the documentation for 6 years. If the SBA requests this information at any point, and it is not available, the SBA will assume the company was not eligible for the loan. The government will then focus its resources on businesses that have borrowed more than 2MM.
If you have any clients that will be audited, make sure they are also ready with accurate and up to date documentation. Timely gathering of evidence for all transactions is crucial. Looking for a tech solution to help with this is highly recommended. However, make sure the system is comprehensive and can drill down to transactions.
To be ready for an audit, take the following steps into account:
- Be familiar with the purpose and requisites to get the PPP loan and loan forgiveness.
- Meet with your clients to set up the processes and procedures that will support the accurate gathering of documentation and evidence in case of an audit.
- Run a mock audit to identify areas that need more evidence.
Make sure to join Johan Colvig for his webinar "Learn How to Manage & Advise on PPP Forgiveness," on May 20 at 2:00 p.m. Eastern Time. Register here.
Risk 3: Another COVID-19 Wave Hits
- Probability: 4
- Impact: 5
- Risk: 20
What if coronavirus hits again?
Some businesses are starting to open up, so we can expect the coronavirus curve to go up again soon. How high the curve will be, we cannot know. What the government will do, we cannot know. But how can we prepare for another lockdown?
To mitigate the loss from another social-distancing policy, you may:
1. Optimize/set up your virtual firm. This might be a good time to examine how to efficiently run a virtual firm. Consider the resources and tools you are currently using. Consider what tools you need to implement to help management your practice, gather documentation, automate analysis, and provide advisory services.
2. Diversify customer base. What is your main source of income? Some firms' main revenue stream relies on non-essential business clients solely. This makes them vulnerable to the pandemic crisis. You might want to add essential business clients to your customer base.
3. Provide relevant and diversified services. P roviding services that account for both accounting and finance can be very beneficial for clients that are looking for a one stop accounting firm. Bookkeeping and taxes are not your cup of tea? Take advantage of outsourcing and automation to provide those services.
Some relevant services today are:
- Advisory to help clients get PPP loan forgiveness. This will be critical for your clients to stay in business. And it is key for you to become their trusted advisor. Also, you’ll keep your clients and will attract more referred clients in the future.
- Creating cash flow forecasts. Monitoring cash flows is essential to identify trends and make course corrections.
- Debt restructuring. Coach your clients to find ways to increase liquidity by renegotiating interest payment, for example. And make sure they strengthen their solvency to be prepared for future crises.
- Providing business analysis. This will help your clients be aware of the financial health of their company. Coach them to improve areas that are weak and be ready to weather future storms.
- Develop a mitigation plan for their business. Start a discussion with your clients to assess the risks their businesses face. Help them develop and put a mitigation plan in place.
4. Develop new skills and/or qualifications. Think of skills that you might need to refine and identify trends so that you can be ahead of the curve. What new skills do you need to develop to be in that position? What are your tech skills? What about developing knowledge about other trending industries?
5. Develop a risk mitigation plan for yourself. The key to be prepared is planning and execution. Create a plan with a clear outline of actions you will take. Set up a deadline and execute. Some items to think about are: emergency fund, loan qualification to access capital if needed, development of multiple income streams, getting insurance, and so forth.
It is human nature to spend most of our energy and time on what is urgent and prioritize lower in the list those items that help us weather future storms. Preparing for the future can set us up for success and reduce risks of loss. By assessing the imminent risks and developing a mitigation plan, you will be better prepared than the average accounting firm.
Make sure to join Johan Colvig for his webinar "Learn How to Manage & Advise on PPP Forgiveness," on May 20 at 2:00 p.m. Eastern Time. Register here.
Author Bio: Sofia Carreno is the VP of training and onboarding at MoreReporting. She has 10+ years university teaching experience. She got a masters in Business Administration and English Teaching. She is passionate about empowering MoreReporting's partners. She helps them learn how to efficiently use the software and supports them during their transformation to advisory.