Financial Stability in Crisis

What challenges did you see from companies struggling through the pandemic?

Companies were concerned about their financial stability in crisis when the pandemic hit. They were trying to make decisions for the health and safety of their team members and their businesses. Faced with hard decisions during the Stay Home, Stay Safe executive order, and again as they returned to work in May, and even now. Many companies faced shifting their operations from an office environment to working remotely. It happened almost overnight, so they had real technology and security concerns about the transition. On top of that, many businesses didn’t know if they qualified for relief programs such as the Paycheck Protection Program and other SBA loans. It was a perfect storm of uncertainty.

What can construction companies do to remain stable financially during turbulent times? What should construction companies include in their business financial plans to help them prepare for unforeseen challenges?

Manage your cash flow and have a cash plan for your business. You can use cash flow schedules to track cash-on-hand and evaluate whether you have enough cash to support your business needs for the next one to three months (at a minimum) and through the next year. Identify your short-term and long-term needs. Will your cash flow meet them? If not, determine what you can do now to increase future cash flow. Increasing cash flow might include new projects, negotiating retainage reductions, and coordinating customer payment terms with material/subcontractor payment terms. You should also create a plan for reducing future cash outflows. This could include reducing expenses, restructuring debt, and communicating with vendors about new payment terms. Perform weekly cash flow updates and evaluate your cash performance monthly.

It’s also a good time to save so you can weather any economic slow-downs or shutdowns, as we’ve experienced with COVID-19.

With many construction companies applying for small business loans and grants to remain in business, what can they expect when filing their 2020 business taxes?

Expect complexity! COVID-19 brought new loan programs, complex relief packages, and changes to existing tax laws. Your situation is probably much different from your neighbor’s. It’s best to connect with your tax professional to understand your unique situation. If you don’t have a tax professional that understands your industry, you might want to hire one for your 2020 tax return preparation and planning.

I want to share one example specific to the Paycheck Protection Program (PPP) that demonstrates this complexity. According to the CARES Act, any PPP loan forgiveness amounts will not be taxable. And, current IRS regulations state that companies can’t deduct expenses they paid for with PPP loan funds. So, the loan forgiveness amount isn’t truly tax-free under current IRS regulations. Your company will have to pay income tax for the loan amount that’s forgiven.

The Treasury Department and Congress are hoping to change this because it wasn’t the intent of the PPP when the CARES Act passed. New legislation may change the IRS’s position and allows PPP loan expenses to be deductible for 2020. However, it might not happen until late 2020 and could depend on the results of the general election in November.

How can contractors minimize tax liabilities to improve their financial strategy?

Contractors benefit from having several tax accounting methods they can choose from to help minimize their tax liability. They can pick the one that works best for them. Not many industries have these options.

How can contractors ensure their bonding capacity remains strong?

Surety requires certain levels of working capital, capitalization, and cash to fund 180 days of operations and cover possible losses. In most cases, sureties expect a line of credit agreement as an additional funding tool. Communicate with your surety agent regularly – when times are good and when they’re challenging. Ask your surety agent to weigh in on future plans or decisions, so your agent can help you understand how these decisions may impact your bonding capacity.

How can construction companies financially recover after a crisis?

I think companies can absolutely recover if they take care of their customers, know and use their employees’ talents, and manage their cash, especially their profit margins. It’s also important to seek out the types of projects that your company and team members are best suited to perform. Embrace technology that 1) integrates systems that can communicate with each other, and 2) provides timely key performance indicators (KPIs) and information that helps you manage your productivity and profitability in real-time. Stay positive, flexible, and open to change.

What is your hope for construction companies in Michigan as we move forward?

It’s been a tough six months for businesses across the board. We’re still learning and making adjustments. But, I’m hopeful that Michigan is on a steady path toward recovery and that construction companies across the state have been able to embrace change and use it to make them stronger, more versatile, and poised for growth. As always, I hope there are only good things to come. We will only be stronger because of this.