As an entrepreneur, running a business can often feel like driving a car while changing the tires at the same time. Building a company that has a unique offering, strong value-led culture, and an attractive valuation is a process of constant adjustment.
Compounding this, the COVID-19 pandemic has added a unique set of challenges of operating, pivoting, and reopening a business. For most, long-term goals and aspirations feel like they are now on hold indefinitely.
Fortunately, this doesn’t have to be the case. The fundamental best practices that owners should put in place to set out their growth and exit strategy remain as before; they’ve just shifted a little. So, while the route to success may feel uncertain right now, there are some practical considerations for business owners to ensure their business ambitions can remain on course.
First protect your greatest asset; your people
As a small business owner, you know that your employees are the life blood of your business; many of them critical to your company’s future success. But in the current climate, maintaining your most valuable employees is a significant worry, and with retention more competitive than ever, qualified plans and group benefits alone may not be enough to entice them to stay.
It is however possible to maintain a valued and engaged workforce. There are in fact different types of benefit plans that are designed specifically to retain and reward those identified as critical to the success of the business. Retention bonus plans, split dollar arrangements, nonqualified deferred compensation and the like, when designed correctly, can allow the employee to supplement their retirement income and encourage them to remain with the company for a long time.
Maintain higher levels of liquidity
Unfortunately, as previous recessions have shown, it’s not always possible to rely on banks. Lines of credit are helpful, but they can be pulled at any time for any reason. Given that the end of the pandemic isn’t yet in sight, and no-one knows if there will be any further stimulus for businesses, it is important to maintain focus on what we can control: cash.
In a normal year, if profits decrease by 2 – 3% most business owners would not be concerned because it falls within the usual level of risk tolerance. If that is the case, then why not take 2 – 3% of earnings off the table each year to move it somewhere safe, perhaps even to the personal balance sheet where you don’t have to take any unnecessary risk. These dollars can be used for a number of things and most importantly to maintain a minimum of 6 months, and ideally 12 months, of working capital on hand in the event of any “unexpected” life events.
In an unstable economy, cash is always good. But given the current levels of uncertainty, as well as looking good on a balance sheet in the long term, maintaining cash in the medium term might also be a prudent strategy going in to 2021.
Qui Audit; (s)he who CARES wins
The US Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, is a law intended to address the economic fallout of the COVID-19 pandemic. As a business owner, understanding it is vital, and with proper financial, legal and tax advice, it can be the key to unlocking vital tax relief for the business and new provisions that impact Retirement Plans and contributions.
One example that could apply is employee retention credit. Under this provision, there is a refundable payroll tax credit for 50% of wages paid by employers to employees during the COVID-19 crisis. This credit is available for those business’s whose operations were fully or partially suspended due to a COVID-19 related shut down order, or had gross receipts declined by more than 50% when compared to the same quarter the prior year.
The Act also substantially reduces restrictions on Net Operating Loss (NOL)s rules. It now provides a five-year carryback for losses earned in 2018, 2019 or 2020 which allows for businesses to modify tax returns up to five years prior to offset losses in those years. It suspends the NOL limit of 80% of taxable income and pass-through entity’s may use NOLs to offset their non-business income above the previous limits for 2018, 2019 and 2020.
These rules are complicated; that’s why proper advice is needed. But the purpose of the Act is to assist and protect business recovery, so although no silver bullet, some businesses may be able to take advantage of provisions in a meaningful way to provide vital stimulus to the financials.
The importance of an insurance backstop
Given everything that business owners have been through this year, thinking about insurance now might feel like closing the stable door after the horse has bolted. However, protection against threats that if left uninsured could result in financial ruin for your business and you personally remains the most stable foundation to any business plan.
Think of your business like the goose that laid the golden egg; if you had to ensure one or the other, it’s going to be the goose because it’s the source of more golden eggs. Your business is the engine that creates the cash flow needed to make everything else in your life a reality.
Therefore, you need to make sure that you have a risk assessment team in place that will educate you on your existing coverages and what threats still exist that you might not have even considered. Whether it’s cover for your IP, or straight forward business interruption policies, the COVID-19 pandemic hasn’t changed the fact that an uncovered loss will always be greater than the premiums to cover the threat itself.
Into the unknown
Although for many business owners, the post-COVID-19 may feel like unchartered territory, there is still a route map for success. Many adjustments, big or small, are founded on the existing best principles already in place for maximizing a businesses’ potential; they have just been thrown into shaper relief. Yes, as an owner, it will still feel like driving the car while changing the tires, but the good news is a good mechanic can mean your plan doesn’t have to veer off course.
Will Hage is a Wealth Management Advisor at WestPac Wealth Partners in La Jolla, CA, who focuses on financial strategies for business owners to protect, invest, and achieve the full potential of their business.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 4275 Executive Square #800 La Jolla, CA 92037 619.684.6400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. WestPac Wealth Partners, LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License # 0D97541 | 2020-104372 Exp. 06/22 | This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.