- Implement dynamic forecasting to make data-driven accounting decisions.
- Project loan forgiveness and track funds to get the most out of your PPP loan.
- Form a general understanding of available tax credits.
- Embrace technology and move to the cloud to create more efficient processes.
Need additional accounting guidance?
It’s undeniable that COVID-19 has changed the way businesses operate. Changes vary from organization to organization, but in most cases there is a call for innovative thinking and improved financial planning.
The accounting profession has a rare opportunity to help organizations navigate these changes and the resulting economic impacts. It is our sincere hope that our profession rises to the occasion of helping organizations think differently and plan better. Professionals who shift their focus to the five areas below have an immense opportunity to make a difference in the organizations they support.
1. Dynamic forecasting
In recent years, thought leadership pieces have consistently encouraged accounting teams to move from bookkeepers to business advisors who help organizations make data-driven financial decisions. This shift is more critical now than ever before. Make sure your accounting team has a budget and cash flow forecast in place that allows for adjustments for COVID-19 impacts and for modeling across different recovery scenarios.
These models should define your best, worst, and most likely scenarios, and provide a framework for planning tactical responses to each. This could include non-labor cost cutting, workforce reductions, compensation adjustments, market expansion, supplier changes, and price changes, just to name a few.
Your accounting team should build these dynamic models so they are easy to update with actuals and as assumptions change over time. Your accounting team should also help drive the difficult conversations, and if there is a need for cost reductions, they should come to the table with ideas on where to eliminate costs with the least amount of disruption to your business.
In this area, you may find it difficult to shake the accountant stereotype of being “cheap” or “policing” the organization. But you must demand from your accounting team today that they provide frank and honest feedback. If there’s likely to be a cash crunch down the road, you want your accounting team to utilize sound financial modeling techniques to tell you now. To facilitate that, you need to make sure you create a space for them to do so without backlash.
2. Project PPP forgiveness
Many COVID-19 financial models likely include Paycheck Protection Program (PPP) loans. It’s now common knowledge that the PPP forgiveness rules are complicated and continue to evolve.
This should be top of mind for your accounting team. Stay up to date on the rules, maintain appropriate documentation, and track all the right metrics on an actuals and projected basis. It is critically important to consider all of these things in tandem in order to guide current decisions that will ultimately have an impact on the amount of your PPP loan that may be forgiven. Do not assume 100% forgiveness and risk facing loan repayments for which you were not prepared.
Managing the PPP loan process and strategy is new and beyond the normal call of duty for your accounting team. It’s a lot to ask of them, but it also presents an opportunity for your team to shine and provide incredible value to your organization.
For accounting teams that don’t know where to turn, there are trusted resources available. Also, consider investing in additional support through either legal counsel or outsourced accounting.
3. Account for and track your PPP loan
There are many different questions around how to account for funds received from a PPP loan. Do you have to keep the funds in a separate account? Should you show a reduction in expense for any PPP funds you use to cover costs?
These questions are understandable, given how complex the PPP loan process has been. But don’t get hung up on details or overthink the accounting. Take a step back and keep it simple. Until forgiven, PPP funds are like any other loan. Once you receive the cash, book the other side as a liability and record all subsequent transactions (payroll, rent, etc.) like any other loan.
Only when your loan or a portion of your loan is forgiven should there be any impact to your income statement (outside of interest expense). At that time, reduce your liability by the forgiven portion and book the credit as other income to an account usually named “Debt Forgiveness.” Your organization then recognizes the lift to your profit and loss as a result of the PPP loan forgiveness, but it’s kept separate from normal operating results.
In addition to properly accounting for the loan, your team should maintain and store airtight payroll records as well as appropriate documentation for other allowable costs under the PPP. It’s crucial to maintain this documentation for the PPP forgiveness application process.
4. Take advantage of tax credits
With so much attention on PPP and other loan and grant programs, you may overlook tax relief that can add up to significant dollars. Accounting teams must have an understanding of available tax relief and what they can do from a planning perspective to take advantage of these credits. Since many of the tax and funding programs have components of overlap and exclusions, accounting teams need to form a holistic understanding of how these programs interplay.
For example, from a payroll perspective, you could previously only defer the employer portion of social security for PPP borrowers when the PPP loan was forgiven. PPP borrowers may now defer employer social security obligations incurred through December 31, 2020. In addition, there is an employee retention tax credit based on compensation levels available to those employers who are not PPP borrowers. There are also Family and Medical Leave Act (FMLA) tax credits available — but you can’t claim credits on expenses that are covered by your PPP loan.
The paragraph above may make your head spin. But in addition to the credits with a lot of interplay, there are other tax relief opportunities that may benefit your organization. These include the reinstatement of net operating loss (NOL) carrybacks, corporate credit for prior year unused Alternative Minimum Tax (AMT) carryovers, bonus depreciation for qualified improvement property, and more. Finally, there are provisions that create tax opportunities for individuals.
It’s nearly impossible for your accounting team to master all of these credits and provisions. However, they should have a general understanding of what is available to your organization and seek further guidance with a trusted tax advisor.
5. Transition to the cloud
This pandemic has placed a spotlight on how processes that must be performed manually and onsite will get done safely.
As a solution, many organizations have embraced technology and moved to the cloud. While it may have felt forced initially, those organizations discovered that taking the bold move forward has automated their processes in ways that enhance control and improve operational efficiency.
In need of two wet signatures to pay a bill? There are now bill payment systems to automate approval workflows and release payment. Do you still have receipts stapled to a paper expense report? You can now take pictures of receipts on your phone and submit for approval. Once approved, connected apps automatically post the journal entry in the general ledger (also cloud-based) and send a direct deposit to the employee, eliminating two manual accounting processes along the way.
There are thousands of incredible applications available for you to automate even the simplest of processes at a reasonable cost. Your accounting team should be aware of what is available in the market to move your organization to the cloud and have the know-how to take your organization through this much needed change.
How we can help
Many of the areas outlined above may be new to your accounting team. We understand that drastic changes can be overwhelming, especially on top of the existing stress due to COVID-19. We are here to help every step of the way.
If your team needs support, visit the CLA COVID-19 resource center, which is continuously updated with articles, webcasts, and tools covering all of the topics above. Or, contact us to discuss an assessment of your accounting and finance functions, to help your team better support your organization.