On March 31, 2020, the Department of Treasury (the “Department”) issued guidance on implementing the Paycheck Protection Program (PPP). 

Very simply, I encourage all readers to go the attached link: 
https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses

Within that site are four links including:
 

1. Top-line overview
2. Guidance for lenders
3. Guidance for borrowers
4. The application banks are to use for the PPP Loan

Items of note: 

1. Starting April 3, 2020, small businesses and sole proprietorships can apply.
2. Starting April 10, 2020, independent contractors and self-employed individuals can apply.
3. The Department encourages borrowers to apply as quickly as possible because there is a funding cap. 
4. The Department  encourages borrowers to consult with their local lender as to whether it is participating.
5. All loans will have the same terms regardless of lender or borrower.
6. The exclusion of employees compensated over $100,000 is clarified to be that the amount over $100,000 is excluded, not the entire compensation.
7. Borrowers will have until June 30 to restore staffing levels and wage levels for any changes made between February 15, 2020 and April 26, 2020, or the amount of the loan forgiveness will be reduced.
8. The interest rate on the loan was reduced from 4.00% to 0.50%.
9. Any portion of the loan that remains unforgiven is due in 2 years, a change from the 10 years described in the legislation.
10. The guidance provides a list of things that borrowers will need to document and certify.

 
We will continue to monitor the implementation of the CARES Act over the coming days, and we will issue clarifying statements.  
***

W. Karl Baker, CPA, spends his time thinking about ways to help organizations with sound financial decisions, including improving revenue cycle management, and access to capital.  Find more information at www.BakerCFOadvisory.com and www.InfinityCommCapital.com.  Karl can be reached at (781) 854-2248 or kbaker@infinitycommcapital.com. 

We are all being impacted in one way or another by the current COVID-19 (coronavirus) pandemic running around the world.  If you are running a business and you find that the impact is more than the business can handle with its own resources, you should know about the resources available. 

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act) was signed into law by President Trump on Friday, March 27, 2020.   This act was an effort to provide assistance to individuals, businesses, and health care providers in response to the outfall of the health pandemic and its economic consequences.

The actual text of H.R. 748 can be found at the following link:
https://www.congress.gov/bill/116th-congress/house-bill/748/text?q=%7B%22search%22%3A%5B%22hr748%22%5D%7D&r=1&s=2
 
There are many important provisions of the CARES Act, addressing matters such as unemployment, health care, and other matters.  The purpose of this article is to summarize capital issues available to businesses as made available by the CARES Act, as well as by the Small Business Administration (the “SBA”).  It is important to understand that once any legislation is signed it takes time for regulations and procedures to be developed by the agencies charged with implementing the legislation.  Therefore, some information will evolve as time passes in the next few days. 

There are two main avenues to access needed capital.  Businesses can only receive loans from one program, unless a business has received disaster funding unrelated to the coronavirus disaster.  These programs are summarized as follows:
 
Economic Injury Disaster Loan Program and other relief directly by the SBA:

$10 billion has been allocated to fund this program.  Eligible business types will include small businesses, non-profits and other types of businesses. 

Businesses apply for this program directly with the SBA, with loans available up to $2 million.  Terms will be attractive with low rates, 2.75% and 3.75% for non-profits and for-profits, respectively, and repayment terms up to 30 years.  This program will only be available to businesses operating in declared disaster areas. 

The SBA requirement that personal guarantees is waived for loans up to $200,000. Business collateral may still apply.  Eligible businesses need to have been in business on January 31, 2020, but the requirement that they be in business for one year prior to the disaster has been waived.  The “credit elsewhere” test, which requires the borrower to assert inability to obtain financing from other sources, is also waived. The CARES Act allows the SBA to evaluate a borrower’s ability to repay based solely on the credit score and not require a tax return to be submitted.

Upon applying the SBA is authorized to advance $10,000 within three days of receipt of the application.  The advance may be used to provide paid sick leave to employees unable to work due to the direct effect of the COVID–19, maintain payroll to retain employees during business disruptions or substantial slowdowns, meet increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains, make rent or mortgage payments, and repay obligations that cannot be met due to revenue losses.  A business will not be required to repay the advance even if subsequent denied an EIDL.
 
SBA 7(a) Paycheck Protection Program Loan (“PPP” and “PPPL”):

Loan:

$349 billion has been allocated to fund this program.  Businesses will apply for this program through current SBA lenders. The SBA may streamline this process and bring other lenders into the process.  Eligible business types will include small businesses and 501(c)(3) nonprofits, with not more than 500 employees.  Other types and sizes may also be included.  Additionally, sole-proprietors, independent contractors, and other self-employed individuals may be eligible for loans.  The business must be operational with paid staff or independent contractors as of February 15, 2020.

There is a prescribed formula for determining the eligible loan amount.  The loan maximum will be calculated as the average eligible monthly payroll costs, based on prior 12 months, excluding compensation above $100,000 in wages, multiplied by 2.5 months, plus the balance of any SBA loan closed between January 31 2020, and when this loan will be made, if applicable.  The maximum loan will be $10 million. 

Allowable uses of the loan include eligible payroll support (eligible employee salaries, excluding compensation above $100,000 in wages, but including paid sick or medical leave, insurance premiums), interest paid on a mortgage (excludes any prepayment of or payment of principal) or rent, and utility payments.

Loan terms will include 4% and repayments terms of 10-years. There will be no prepayment penalty, which makes an exception to other SBA 7(a) loans.  The PPP allows for deferment of SBA 7(a) loan payments for six to 12 months.  Making another exception to SBA 7(a) loans, there will be no collateral attached to the loan, including a waiver of the borrower’s personal guarantee and personal assets. The “credit elsewhere” provision is also waived. The normal fee collected by the SBA is also waived.

The PPP increases the government guarantee of 7(a) loans from 75% to 100% for a PPPL.

The PPP increases the maximum loan for an SBA Express Loan from $350,000 to $1 million through December 31, 2020, after which point the Express Loan will have a maximum of $350,000.

The PPP ensures that the processing and disbursement of covered loans prioritizes small business concerns and entities in underserved and rural markets, including veterans and members of the military community, and small businesses owned and controlled by socially and economically disadvantaged individuals.

Eligible borrowers will be required to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; they will use the funds to retain workers and maintain payroll, lease, and utility payments; and they are not receiving duplicative funds for the same uses from another SBA program. 

Loan Forgiveness:

The borrower is eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on eligible payroll costs, excluding compensation above $100,000 in individual wages, interest payments on any mortgage incurred prior to February 15, 2020 (excludes principal and prepayments), payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020. Amounts forgiven may not exceed the principal amount of the loan. Borrowers will verify these payments through documentation required by lenders.

The borrower will need to apply for the loan forgiveness with the lender after the 8-week period, with required supporting documentation, and the lender is required to process and decide upon the loan forgiveness within 60 days.  The lender will be reimbursed by the SBA for the forgiven loan and accrued interest within 90 days of the loan forgiveness application being approved.

The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.

Canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.
 
Other questions:
The law was passed on March 27, 2020.  It will take a few days for the legislation to be fully assimilated and for rules and procedures to be developed, distributed and implemented.  With that in mind there are questions that will be assessed:
 
Should we apply for a EIDL or a PPPL?
An assessment should be made based on your anticipated needs.  The PPPL will be limited to a business’ average payroll for 2.5 months but could be at least partially forgiven.  A business could qualify for more funding with an EIDL, which has very favorable terms but will not be forgiven. 
 
What will be needed?
The following is a list of items likely to be required to complete the processing of an application for either the EIDL or PPPL, but banks will be making these determinations:

• Completed Application including personal financial statements for owners if applying for loan over $200,000 under the EIDL program
• Articles of Incorporation/Organization of each borrowing entity
• By Laws/Operating Agreement of each borrowing entity
• All owners Driver’s Licenses
• Payroll Expense verification documents to include:
  • Identification of payroll from employees that are paid less than $100,000 per year.
  • IRS Form 940 and 941
  • Payroll Summary Report or other documentation as of February 15, 2020 with corresponding bank statement
  • Summary of payroll benefits (taxes, vacation, allowance for dismissal, group healthcare benefits, retirement benefits, etc.)
• 1099s (if Independent Contractor)
• Certification that all employees live within the United States. If any do not, provide a detailed list with corresponding salaries of all employees outside the United States
• Trailing twelve-month profit and loss statement (as of the date of application) for all applicants
• Most recent mortgage statement or rent statement and cancelled checks
• Most recent utility bills and cancelled checks

 
When can we begin applying?
There are basics that you can begin collecting.  There are advantages to getting into the queue with lenders.  There are already thousands of preliminary applications submitted.
 
When will loans begin to be processed and evaluated?
This is unknown, but will likely not be before several days to two weeks.    If a business applies for the EIDL, the SBA is required to advance $10,000 within three days.
 
How long will it take to process a loan and when should we expect funding?
This is also unknown, but it’s expected to be significantly streamlined.
 
Are there obvious advantages to applying at multiple banks?
There are unlikely to be advantages for applying at multiple banks. Normally SBA lenders compete for credit applications, based on their own lending criteria, yet staying within SBA guidelines.  However, with the PPP the lenders are all applying the same creditworthiness assessment.  It is possible that judgment will be applied by one bank differently than another bank.     
However, it will be important to get into the queue with the chosen bank.  If a business finds that their existing bank is unable to help them on a timely basis, it may be a good idea to work with a loan broker, as they have relationships with numerous lenders and can assess wait times before submitting applications.
 
What if we have laid off employees?  Will we need to retroactively restore wages?
No.  If a business has cut wage or staff, the business will need to restore wages and/or staff within 30 days of the CARES Act.
 
We will continue to monitor the implementation of the CARES Act over the coming days, and we will issue clarifying statements. 
 
***
 
W. Karl Baker, CPA, spends his time thinking about ways to help organizations with sound financial decisions, including improving revenue cycle management, and access to capital.  Find more information at www.BakerCFOadvisory.com and www.InfinityCommCapital.com.  Karl can be reached at (781) 854-2248 or karl@bakercfoadvisory.com.

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​Last month I started a series offering various best practices and tips to address the many challenges
executives at health centers face.

This month, I’m going to write about a topic that is a major challenge to many executives: how to
improve the accuracy of monthly financial statements, and do it in a timely basis. Numerous clients over
the years have told me they either never receive monthly financial statements, relying on year end
audits, or they take two to three months to receive them and even then, the accuracy is questionable or
the usefulness is limited per the executives I’m speaking to.

I’ll start by saying that your organization should be generating accurate financial statements prepared in
accordance with generally accepted accounting principles (GAAP) on a monthly basis. I have had some
organizational senior leaders tell me that their financial leadership tell them it’s not possible to prepare
financial statements monthly. Not true, and that’s a red flag. There are many schools of thought as to
timeliness, but not too many different views as to whether it’s possible to generate GAAP-basis
financials on a monthly basis. It’s possible. Some organizations are able to generate their financial
statements within 5-10 days after month end and some take longer. Some take MUCH! longer. My rule
of thumb would be that in no circumstances should it take longer than 30 days after each month end to
generate monthly financial statements.

If you’re reading this and you are thinking, “We’re not getting financial statements out the door before
60 days. What is the disconnect?” Very simply, it’s leadership overseeing bad processes. Often times it
is due to the perception that all the work done at year end in order to close the books for a year end
close and for the independent audit needs to be done monthly, and therefore the conclusion is that it
takes too long. However, I would flip that around. As a practical approach, it is important to perform an
accurate monthly close process in order to generate the financial statements, and with a good monthly
process, the effort needed to perform the annual close is much less of an undertaking.

The quicker an organization needs its financial statements the more likely they will need to either have a
robust and accurate purchase order system or a strong system of recording estimated accruals.

If 25-30 days is an acceptable time frame, then the accounting department needs to choose a final day to
“cut off” each of the major accounting cycles: revenues and disbursements/payables. The primary
reason for the stated delay provided by accounting departments is receiving invoices with dates of
service related to the prior month.

A typical approach would be the following schedule if we use the 25 th as an example:

1. Close revenues by the 5th of the month
2. Close payables by the 15th of the month – this means that any invoices received after the 15th that are related to the prior month will be posted to the general ledger with the current month instead of the prior month. As the accountants study trends, they will get a sense of the volume of invoices that are received late and can then accrue estimates for the “yet to be received” invoices. Additionally, the payables team could reach out to the vendor to request earlier receipt of the invoices.
3. Perform bank reconciliations by the 8th day of the month
4. Before the 20th , perform other close procedures: monthly journal entries, accrued payroll, etc.
5. By the 20th of the month, prepare first drafts of the financial statements for review.
6. Between the 20th and the 25th, perform various analyses and make corrections or revisions as necessary.

Some companies use cash basis for recording payroll, which is an inaccurate approach. Those 2-3
months per year where there are “3 payrolls” cause results to dip. Since most payroll is paid in arrears,
accruing payroll based on dates of the payroll period will fix these spikes in payroll expense.

How do companies generate financial statements with a quicker time frame than the above, for example
8 to 10 days? Most companies do not receive enough of their invoices from their vendors within a day
or two of month end in order to post accurate accruals. One approach is to use a purchase order (PO)
system that records accounts payable transactions and expenses based on their internal PO system. This
allows them to record expenses without waiting for invoicing. If they do not have a PO system, they are
simply using an estimated accrual system. They have studied trends and identified major expenses to
accrue and use an estimation process. This is quite an effective approach. Once past a learning curve, it
allows the team to issue materially accurate financial statements within a few days of month end. There
may be a need to keep the books open longer for year end in order to rely on hard data for the year end
close but it is an effective approach throughout the year.

In the next article, we will continue discussing the month end close by discussing tips for accurate
revenue recognition, which also impacts A/R.

​What lessons are you taking away from these thoughts? I hope at the very least it is that a professional
approach to monthly financial statement production can help executives have the information they
need to run their health center effectively. Additionally, a second set of eyes can be immensely
valuable.

Executives need information to run their health care organization.  I talk to CEO’s all the time about their challenges, and I have put the broad challenges into the following categories simply to apply some framework:

• Strategy
• Financial management
• Operations management

I consistently get the following feedback:  I don’t have the financial leadership support I need; I  need information; the board needs to be educated about the complexities of our organization; I am not even comfortable that the monthly information is accurate; cash flow seems to be low; we frankly have no idea if the billing department is doing a good job; any financial surprises in the near future may cause some pretty big problems for us, but we don’t really know; the results from the annual audit don’t correlate with monthly data I receive and I have no idea why; we think we’re fine, and then the audit comes along and the results are remarkably worse; we receive offers to sign capitation contracts, and yet we don’t know how to evaluate them; and many, many more comments like that.

I think it’s possible for you to know what you don’t know.  Over the next several months, I’m going to offer a series of articles to give some tips, feedback and pointers on several of the challenges you are facing.   I’ll address topics such as board governance and education, strategic planning, financial reporting best practices, business office best practices, technology, billing and collections, financial management, contracting, evaluating lines of business, and cash management.

This month, I’m going to start with a topic that is a major challenge to many Chief Executive Officers (CEO’s): board oversight and education.  This is a common challenge that I frequently encounter with organizations.   

Board members are typically voluntary members, recruited to the health care center for various skill sets they may have.  As a general rule, the board of directors is responsible for overseeing the planning and direction of the health center, oversight of legal and ethical compliance matters, and ensuring resources and plans are in place to have an effective operation.  This latter component is especially accomplished by hiring the CEO to carry out the management of the organization. 

CEO’s want their volunteer board members to better understand the business but time is tight during board meetings, and the business is complicated.  So how to make the complicated simple in a short time is a big challenge.  Certain members of the board may participate in certain subcommittees such as finance/audit, compliance, etc.  Members of these committees will likely dive deeper into understanding keys to success.

I’ve found board members first need to understand the various components of the reporting package: the statement of financial position (balance sheet) and statement of activities & change in net assets (income statement & change in retained earnings), and statement of cash flows, along with the important metrics and line items to pay attention too.  This being a broad article, I’ll not go into the details but I do find that I often need to explain in basic terms the basics of each statement, what they mean, differences between accounts receivable (A/R) and revenues, etc.

After a financial statement 101 training, the issues that cause the most complexity usually involve liquidity and working capital, revenues and their connectivity to visit and encounter activity, along with collections.

I’ll talk in a future article about managing revenue and A/R valuations, but board members need to understand the key drivers of success.  As an aside, I’m often asked about industry benchmarking, which I do think is important, and is why I’m in process of rolling out some benchmarks for health care providers, but I also always emphasize that benchmarks need to be studied in context.  It’s important for health centers to develop their own target metrics that will help them measure results compared to their goals.  For example, I’ve seen certain health centers target certain metrics such as “days cash on hand” or “days sales in accounts receivable” in accordance with their strategic objectives, even when their targets varied from industry benchmarks.

Certain key drivers include knowing the health center’s cash position (days cash on hand), working capital, how long it takes for average claims to be paid, revenues by service line (in “total” and “per visit”) as well as visits/encounters by service line.  I usually also advise reporting on monthly cash collections, as this will give you some correlation to revenues and A/R.  Other important matters that make a difference in month to month results include number of days the organization was open for the reporting period.  Number of clinic days can make a 5-10% swing in activity and revenues in any given month.  Additionally, I think it is imperative for organizations to understand their margins by department and/or service line. Correlating with cash flow and financial results, it is important for boards to be educated on issues such as staffing, productivity, compliance matters.  Of course, if the health center has incurred debt, it is imperative for the board to understand how the paydown of debt is impacting cash flows, along with the health center’s standing relative to any financial covenants in place.

When presenting to boards and committees, it will be important to assess the most effective way to convey these matters.  I’ve found that charts and graphs help board members visualize the story being conveyed in the metrics.  Members of the finance committee may want to see more details, and they may actually want to see “the numbers”.         
​
I could go on and on about topics to cover in board meetings.  Running a health center is a complicate venture.  It takes time but as the title of the article suggests, it is imperative for board members to “learn” what they likely did not know when they first joined the board.  I’m currently the president of a non-profit organization in my community.  I’ve been on the board for over 10 years.  I’ve personally spent time learning the keys to success for that organization by listening to many, many presentations and soaking it in one meeting at a time.  I’ve worked with many clients over the years, and I am convinced the more the board of directors is given the right information, the better management and the board are able to work together to steer the health center in the right direction.

​If you spend any time receiving daily alerts for job wanted postings, you likely know there are numerous companies looking for new finance leadership.  Lots of opportunity out there. 

So I wanted to give a few tips for a younger person that may be looking for a promotion to their first Chief Financial Officer (“CFO”) role, or perhaps you have landed that job and could use a few tips, especially for accounting professionals that are transitioning to the CFO role. 

Every company handles various tasks differently, and “pushes” down responsibility in different ways depending on the size of the company, available resources, management style, etc.  Therefore, the following is a list of a few things to think about, keeping in mind there are no “bright” lines:

1. Perspective – this is a job that looks forward, not backwards, much more than as a controller or other accountant.  A new CFO will need to have people that can prepare a trustworthy set of numbers so that you don’t have to get into weeds and “audit” the numbers. 
2. Communication – It is now your job to articulate financial reporting, including the story behind the financial results, new accounting standards, financings, metrics, etc.  Oftentimes the audience needs quick and easy to understand answers, so it is imperative that you be able to “make the complex simple”.
3. Decisions and ownership – as the lead financial officer, you now must make the hard decisions to help the health center operate effectively, including staffing and cost analysis, processes, etc.  You need to be able to assess what needs to be done, and hire the right people for the right tasks to get things done.
4. New things will keep you up at night – risk management, strategy, compliance, organizational effectiveness, to name a few.  You are no longer just a part of the process.  You DRIVE the process. 
5. Leverage – you as the new CFO probably need to think about leverage and delegation more than ever before.  I’ve worked with many accountants and controllers that can get deep into the weeds, many times rightfully so, as it is a necessary task.  Somebody has to make sure the accounting department is operating effectively and it often falls on the lead accountant.  That means doing whatever is necessary to ensure transactions are being processed properly, information is compiled for external reporting, etc.  Of course, the CFO may also need to dive in, but if the department is functioning optimally, the CFO can help to keep perspective of the forest instead of the trees.
6. Administrative matters – I just mentioned that a CFO will not get into the accounting weeds.  There are now new and different weeds – contracts, forecasting, investment portfolio management, capital planning and development, lease management, vendor relationships and management, technology, insurance matters, banking relationships, benefit plans, budgets, new service line development, alternative payment plan analyses, human resources, legal and compliance matters, debt financings, fraud prevention, board relations and communications, just to name a few. 

 
CFO’s can fail because they stay in the weeds, either due to style or necessity due to limited resources.  I believe in a very under-appreciated best practice that a second set of eyes can provide enormous benefit.  It is difficult to analyze a given set of facts if you have to compile the facts first.  For example, if a CFO has to compile a financial statement from scratch or has to trace numbers from financial reports to the underlying supporting documentation as a first review because the review has not been performed by a controller, then it is very difficult to perform a higher level “smell test” of the financial statements, which is key for ensuring accuracy and to begin to draw conclusions from the data. 

​The CFO role is a key role; it is very exciting and very challenging.  I encourage any new CFO to embrace the role and develop the habit of continuous lifelong learning.