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Ultimate Guide to the Payroll Protection Program: You’re Approved. Now What?

Updated August 2020

In this guide:
  • Understanding the PPP
  • Budget tracking for loan forgiveness
  • Business forecasting
  • Maximizing cash and funding allocation
  • Schedule a free consultation
What is the payroll protection program (PPP)?

By now, we’ve all heard plenty about the program – the good (Yea! I got the money needed to support my business!), the bad (I was unable to get the funding I requested) and the ugly (why did Ruth’s Chris get all that money??).

At its core, the payroll protection program (PPP) is intended to be a helping hand for the Small Business Administration (SBA). By definition, it is a loan program which is supported by and funded through the CARES (Coronavirus Aid, Relief, and Economic Security) Act. And of course there are strict rules to abide by for those wanting to participate in this program. For example, if employers maintain their payroll and use loan funds for allowed expenses like payroll, rent and utilities for the first 8 weeks after the loan is issued, the loan amount is forgiven. That’s right, “forgiven.” In other words, the portion of the loan used for the purpose mentioned above does not have to be repaid to the federal government. It’s as if the loan converted to become a grant.

The core features of PPP are:

  • All small-scale enterprises are eligible to apply (self-employed individuals, sole proprietors, independent contractors, and small businesses employing less than 500 individuals)
  • The maturity rate of the loan is of two years with a 1% interest rate
  • The initial six months does not require loan payments
  • Personal guarantees or collateral is not needed
  • No additional fees are required
  • The loan can be turned into a nontaxable grant and can be subjected to forgiveness
  • It is NOT FREE MONEY.

Need individualized help? Schedule a free consultation with our outsourced CFO and finance experts.

5 Considerations for managing your PPP money

Now that you have the financing, here are our top five considerations for utilizing, tracking and sustaining it. With some thoughtful planning a little ingenuity, your payroll protection funds could help you through these times and set you up for brighter days ahead.

Understand where the money is going...and what it is intended to do for your business

So you got your PPP loan approved. Now what?

As a recipient of funding, now more than ever, keeping precise bookkeeping is essential.

Loan forgiveness is an incredibly attractive attribute of this program. Your goal should be to deploy the capital optimally so you can have your loan forgiven to the maximum amount permitted by law. For the loan to be treated as a grant by the SBA, this program requires clear proof for the lender – typically your bank or another financial institution.  In other words, mandated tracking and categorizing of all the expenses as well as all supporting documents required to prove those expenses were legitimate.

You and your business must stay on top of fund management. What does your plan for that look like?

The term fund management refers to the administration and control of cash flow. Your primary responsibility as a manager is not only to make sure the funds are being invested where they are effective and also to keep accurate records that will be used later to reconcile the loan amount. In the case of PPP, clear and thorough tracking is a key requirement for loan forgiveness in the future. 

At a bare minimum, organizations should be sure to create a tracking tool that memorializes:

  • The amount spent.
  • The people, services, and creditors on which funds were spent.
  • When were funds spent?
  • The purpose of spending those funds.

As the name implies, a payroll protection program is designed to help finance both payroll and employee benefits. In fact, when used for that purpose, which includes the quick rehiring and maintenance of the headcount, up to 75% of your funding would be “forgiven” by the SBA. Meanwhile, the other 25% when used for rent, utilities, mortgage, and lease payments is treated like a traditional loan requiring to be paid back to the SBA. 

PPP loan forgiveness requires companies to provide proof for their payroll expenses, in the form of bookkeeping records. If the application for PPP has been filed with completed tax forms, then those can be forwarded to the IRS at the time of “settling up” on what is owned and what is to be forgiven. Using those records to substantiate your spending removes a significant task from your plate and allows you to turn attention to running your business amidst all the challenges brought about by the pandemic.

Managing PPP funds is challenging in times like these because not all small businesses employ financial experts to help manage their finances. Absent this support, you're more apt to encounter – or create – risky situations with strong potential for creating financial issues that are avoidable to begin with. Here’s some priceless advice for you: don’t wing it by getting lulled into a false sense of “free money.” 

Get help from professionals like those you’ll be pleased to work with from Focused Energy's financial and accounting services group. During “normal times,” you may take pride in the fact that you do tax filings, payroll, and bookkeeping on your own, however, attempting to abide by the rules of the PPP single-handedly is not worth the risk of making a wrong (i.e., costly) decision.

How long will PPP funds sustain your business? A look at business forecasting

Business forecasting is the process of predicting or estimating future business-related developments. A good business forecast can help in the better adaptation of a changing environment and helps maintain stability. The table below identifies the four forecasting methods,

graphic budget forecasting types for PPP | Focused Energy CFOs Colorado
Source: Corporate Finance Institute

There are several reasons why business forecasting is essential including to produce revenue reliability, improve organizational performance, and to increase both customer satisfaction levels and employee engagement. While PPP fund management focuses primarily on employee retention and small-business stability over the first 8 weeks after receiving your funding, at the same time leaders need to look beyond this period and well into the future. 

Operating your business within a much calmer business environment presents enough challenge as it is. Meanwhile, COVID-19 likely challenges you in unprecedented ways: you're doing your best to operate at your highest level and make payroll...while working remotely which may be a whole new dynamic for you. Diligent and realistic forecasting will help you navigate this new scenario in the immediate time frame, as well as enable visibility of the opportunities and challenges that may lie ahead.

With so many uncertainties these days, managing your business is especially tricky but reliable, accurate and timely forecasting will put you in a position to thrive down the road. But forecasting only gets you to the starting line. Only if you are committed to taking action will you get down the road and ahead of the field. You need to keep this important point in mind: reliable forecasting is not worth the effort it takes if you are not committed to taking action based upon what the forecast tells you.

Related reading: Cash Flow Forecasting Tips for Your Business

How effective is your allocation of PPP funding?

To measure the effectiveness of finance planning, intelligent small business owners use a version of a budget-to-actual comparison to find out which part of the business needs more resources and whether not only the budget is realistic and adequate but also assisting in the achievement of your business objectives.

This process starts with the usage of financial data to evaluate the historical spending and revenue of the company and the reliability of those values as they pertain to the business forecasts. In certain cases, the budget to actual comparison is also called budget vs. actual variance analysis, and it highlights the difference between estimated expenses and revenues and the actual amounts. 

The budget to actual comparison provides insights into the “hot spots” of your business – those areas with a variance greater than a few percentage points over or under the estimates. It’s tempting to believe that being “under forecast” in expenses, having lower expenses than forecasted, is a good thing. It is not. 

Image of budget to actuals templateWhat the variance really means is that you can probably do better at forecasting and that you may have misallocated some funds. Watch out for that!  While the perception of  “saving money” might be exciting in the near term, you really have failed to deploy your capital effectively. And failing to deploy your capital effectively is fatal, especially now and especially when deploying capital provided through the PPP. 

To help get you started, take a look at the B2A analysis tool provided here. We encourage you to perform an in depth review of this tool and determine how it can be applied to your business. Please keep in mind that because all businesses vary in their approach to this type of analysis, this tool is designed as a starting point on your way to really understanding your numbers and not a cure-all remedy to business challenges.

Download free Budget to Actuals template

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What does the future hold?

What bold moves are necessary to survive and thrive in this climate? 

What if you see COVID-19 as a call to action: to re-evaluate, retool and recommit to your business? Although it may seem untimely, there is no better time than a crisis to re-evaluate your business vision.

Use this time along with the data gleaned from your forecasting and budgeting to better understand what direction you are going or if you should pivot towards another opportunity unforeseen until now. Have you heard about the distillery that pivoted from making whiskey to making hand sanitizer? You best believe that was not part of their plans six months prior. They saw the opportunity in that moment and turned towards it. Successfully too, I might add.

So ask yourself, does the impact of COVID-19 change your business model or affect your outlook on planned programming, product or software launches? Do you stay the course or pivot? This decision, in turn, could change your budgeting and the employee skills needed to thrive in a post-COVID-19 world.

Related reading: Navigating Change and Managing Risk During COVID-19

What employees do you retain, rehire or retrain?

Identifying and recommitting to the people who are most important to you in life and business increases the probability that you get through this time intact both professionally and personally. In your business, assess your relationships and identify who you need most, who you want to work with, and then dedicate your time there.  When this period of time  is behind us, your team members and your clients will  remember most how you treated them.

Rehiring employees gets money in their pockets but also keeps individuals connected to their jobs as contributing members of the workforce — important considerations in this challenging time. Also important is clear communication to your team, your clients, vendors and relationships in your life. Your team members will respond favorably to the truth, despite how grim it may seem. If you’re limited in your ability to rehire as many of your staff members as you may like, consider those who occupy critical roles and for whom there is no replacement. Is there a team member that possesses legacy knowledge that is critical to your operation? Is there a person or persons whose contributions are directly related to your four key concerns including client satisfaction, employee engagement, revenue and profits?

It may be challenging to do so, but we’ve even heard of clients who resorted to identifying the pros and cons of keeping each employee. Despite the depersonalization of the approach, we later learned that they were able to share their decisions with their team members with honesty and integrity. Again, when this is all said and done, people will remember how you treated them.

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