02.25.21

Manufacturing and Distribution Group Newsletter – Winter 2021
Seamus M. Donoghue, Kenneth Tornheim

COVID-19 Relief Legislation Offers Significant Benefits for Manufacturers

SEAMUS DONOGHUE, CPA, MST

The Consolidated Appropriations Act (CAA), signed into law in December 2020, is known for authorizing the second round of direct stimulus payments to individuals and extending enhanced unemployment benefits. But the law also provides tax relief and new financing opportunities for businesses affected by the COVID-19 pandemic. The following are highlights of key provisions that are most relevant to manufacturers.

Related Read: Significant Changes in the Paycheck Protection Program in Recent Legislation

New PPP financing available

Eligible small businesses that previously received forgivable Paycheck Protection Program (PPP) loans may apply for a “second draw,” provided they have used or will use all of the proceeds of their original loans by the time a second draw is disbursed. Generally, to qualify for an additional loan, you must have 300 employees or fewer and demonstrate a 25% or more decline in gross receipts in any quarter of 2020 compared to the same quarter in 2019. (Special eligibility rules apply to businesses that did not exist during some or all of 2019.)

Like the first round of PPP loans, you may receive up to 2½ times your average monthly payroll costs in 2019 (or in the one-year period preceding the date of the loan), but new loans are capped at $2 million. Businesses that are ineligible for a second draw may be able to increase the amount of their original PPP loans. Also, the CAA permits certain businesses that did not previously receive PPP loans to apply for them. But, you will have to act quickly: Applications are due by March 31, 2021.

Related Read: Paycheck Protection Program Reopening for First and Second Draw Loans

PPP expenses deductible

The CARES Act, which established the PPP program, provided that the amount of PPP loan forgiveness is not included in a borrower’s gross income for tax purposes. But last year, the IRS essentially erased this tax benefit by ruling that borrowers may not deduct expenses paid with the proceeds of loans that have been (or likely will be) forgiven.

The CAA restores the tax advantages of loan forgiveness by overruling the IRS and providing that otherwise deductible expenses remain deductible regardless of whether a loan is forgiven.

Allowable loan uses expanded

As before, to qualify for forgiveness, applicants must use at least 60% of a PPP loan’s proceeds for payroll. But the CAA expands the allowable nonpayroll uses beyond mortgage, rent and utility expenses, to include:

  • “Covered operations expenditures” for software or cloud computing services that facilitate business operations;
  • “Covered property damage costs” related to vandalism or looting due to public disturbances in 2020 and not covered by insurance or otherwise reimbursed;
  • “Covered supplier costs” for goods that are essential to business operations and meet certain requirements; and
  • “Covered worker protection expenditures” to comply with health guidelines, such as expenses for creating drive-through window facilities or air filtration systems.

The CAA also clarifies that payroll costs, for PPP purposes, include employer-provided group life, dental, vision or disability insurance.

More CAA provisions

Other PPP updates of interest include:

  • Modified Covered Period
    The “covered period” is the one during which PPP loan proceeds must be spent on eligible expenses in order to qualify for forgiveness. Originally, the covered period was eight weeks from the time the loan is made. Later, it was extended to 24 weeks, although borrowers that received loans before June 5, 2020, could choose either an 8-week or 24-week period. Now, borrowers can choose a covered period of any length between 8 and 24 weeks.
  • Simplified Forgiveness Application Procedures
    The CAA allows businesses that borrow less than $150,000 to simply certify that they meet the 25% revenue loss requirement. However, they must substantiate compliance with this requirement when (or before) they submit a forgiveness application. Finally, the CAA simplifies the forgiveness application for PPP loans under $150,000.

That Is not all

In addition to the above, the CAA contains several other changes of interest to manufacturers: It makes the Section 179D commercial buildings energy-efficiency tax deduction permanent, extends the time for repaying deferred employee payroll taxes through the end of 2021, expands the employee retention credit and extends the work opportunity credit and empowerment zone incentives through 2025. To ensure that you are making the most of these and other benefits, please contact ORBA.

For more information, contact Seamus Donoghue at sdonoghue@orba.com or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.


Seven cash flow tips for manufacturers

KENNETH TORNHEIM, CPA, CFE

When times are good, manufacturers tend to focus on sales, profitability and growth. Strong growth can conceal cash flow issues. Cash flow is the lifeblood of a business, so it is critical to develop a strategy for managing and improving it. Every manufacturer is different, so the right cash flow strategies depend on your situation.

Related Read: Creating a Business Plan in Uncertain Times

Here are seven tips to consider.

  1. Monitor Cash Flow
    You cannot manage cash flow unless you monitor and measure it. In good times, the income statement usually receives top billing. But in uncertain times, the balance sheet should play a more prominent role. While the income statement is a good gauge of past performance, the balance sheet provides a clearer picture of your current assets and liabilities and the amount of cash you will need in the coming weeks and months.

    Project cash flow under best-case, worst-case and most-likely scenarios and have contingency plans in place for each. Monitor your actual results regularly to spot negative cash flow trends early and address them quickly. 

    Related Read: Five Steps to “Recession-Proof” Your Business

  2. Manage Customers
    Collecting from customers is key to maintaining a strong cash flow, so it is critical to evaluate and manage your customer base. If your business is heavily concentrated on a handful of customers, consider options for growing that base, such as expanding into new markets, developing new products or services, or exploring new marketing techniques. Concentration risks generally happen when one supply chain partner represents more than ten percent of your transactions.

    Also, be sure to evaluate customers’ credit risk. Have their businesses been negatively affected by the COVID-19 pandemic and the resulting economic turmoil? How has this impacted their ability to pay?

  3. Manage Receivables
    Examine ways to convert receivables into cash more quickly. Start by ensuring that invoices are issued on a timely basis and that customers receive regular reminders before payments are due.

    Consider offering discounts for early payment. Ask for deposits for custom jobs and milestone payments for long-term projects. Look into factoring your receivables. (See sidebar “Pros and Cons of Factoring Receivables.”)

  4. Manage Vendors and Suppliers
    A concentrated supplier base can be just as damaging to your cash flow as a concentrated customer base. Failure of a major supplier can hinder your ability to fulfill orders or meet demand. Consider ways you can build a more diversified supplier base. Contact your vendors and suppliers to coordinate the timing of payments. They may be willing to offer extended payment terms or early payment discounts.
  5. Manage Inventory
    Managing inventory can be a delicate balancing act. On one hand, reducing stock levels of raw materials or inventories of finished goods can help boost cash flow. On the other hand, increasing certain inventory levels can help mitigate supply chain risks and avoid raw material shortages.

    Focused inventory management can help you strike a balance between conserving cash and meeting customer demand. To free up cash and reduce storage costs, consider liquidating obsolete or slow-moving inventory.

  6. Improve Efficiency
    Do not overlook the potential impact of efficiency improvements on cash flow. Look for opportunities to streamline processes by redesigning the factory layout, optimizing workflows or taking advantage of automation.

    Also consider opportunities for cutting or eliminating expenses, either temporarily or permanently. Examples include:
       •  Reducing spending on nonessential travel, meetings, entertainment or training;
       •  Leasing equipment instead of buying it;
         Reducing work hours;
       •  Shifting work from temporary to permanent staff;
       •  Cutting or deferring wages;
       •  Suspending matching contributions to retirement plans; and
       •  Delaying capital expenditures.

    Related Read: Is Remote Selling the New Normal? Tips to Make the Most of Your Sales Program

  7. Review Your Financing
    Revisit the status of your outstanding credit lines and other financing arrangements. Have changes to your receivable or inventory levels affected the availability of credit? Have changes to your balance sheet jeopardized your compliance with debt covenants? If so, request a waiver from the lender to avoid being held in default.

    During the COVID-19 pandemic, some manufacturers received Paycheck Protection Program (PPP) loans. To the extent that these loans are forgiven, they can provide a major boost to cash flow. In December 2020, the second round of PPP financing was introduced. Evaluate whether your company can benefit from another round of financing.

An ongoing priority

Managing cash flow is critical during tough times, but it should be an ongoing business activity. Paying attention to cash flow when times are good can enhance your business’s performance and better position it to weather the storm when the next economic downturn comes along.

Related Read: Manufacturing Evolving from COVID-19

Sidebar: Pros and cons of factoring receivables

Uncertainty about collecting accounts receivable is one of the biggest cash flow challenges businesses face. A way to gain some stability in this area is through accounts receivable factoring. Factoring simply means selling receivables to a financial institution or other third party (the “factor”) at a discount. You obtain quick access to cash or a line of credit, and the factor takes responsibility for collecting receivables from your customers.

Before you go this route, be sure to consider the pros and cons. Pros include immediate access to cash and avoidance of many of the headaches associated with collecting from customers. Cons include the expense. Factoring fees can be higher than interest rates on commercial loans and potential customer confusion. Despite the expense, for many struggling businesses, factoring is one of the best options available for obtaining cash quickly.

For more information, contact Ken Tornheim at ktornheim@orba.com or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.

Forward Thinking