Many industries are already feeling the devastating effects of the coronavirus outbreak. Across the country manufacturers and distributors are working to keep their teams and communities safe and healthy while also fighting the full range of effects of the COVID-19 outbreak, like the declining economy, disrupted supply chains, halted operations, and more.
But overcoming these challenges is going to be an uphill battle. In a survey given by the National Association of Manufacturers between February 28 and March 9, 78.3% of respondents claimed that the ongoing pandemic is likely to have a financial impact on their businesses. Furthermore, 53.1% of manufacturers anticipate a change in their operations in the coming months and 35.5% say that they are already facing supply chain disruptions.
Now as we collectively navigate this fluid situation and the resulting effects, we must work together to strategize, implement best practices and come out on top. To do this we need to both identify the challenges lying ahead and design a plan of attack.
What are the unique challenges facing the manufacturing & distribution industry?
The coronavirus outbreak has, without a doubt, had a significant impact on the manufacturing & distribution industry. Data analysis indicates that global production out of China fell to an all-time low in February, with freight and shipping slowing dramatically as the virus closed factories and container ports. Even big name manufacturers, like Honda, have closed down their factories until the end of March, becoming the first major automaker with operations in the US to cease work. Harley Davidson followed suit later in the week. Companies everywhere, of all sizes, are feeling the effects of the global crisis.
In efforts to overcome the challenges presented to manufacturing & distribution companies, we must first pinpoint what those problems are. Our Squar Milner Manufacturing & Distribution leaders identified seven key challenges confronting the industry today as a result of the coronavirus.
These challenges include:
- Dip in demand (i.e., canceled orders, order delays, etc.)
- Customers request credit extensions
- Disruptions in supply chain
- Inability to forecast demand due to high volatility
- Layoffs (i.e., current unemployment impact, future employment issues, etc.)
- Stabilizing operations
- Cash flow issues
So how do those in the M&D industry combat these challenges?
The one constant throughout this situation is that it continues to evolve. Just recently, on March 18, Congress passed a bill that provided a number of tax and nontax provisions.
New tax credits are available for small businesses. Tax deadlines have been pushed back on the federal and state levels. So given the current economic and tax climate, our M&D leaders suggest the following tips to help you fight back against the mounting challenges:
1. Focus on your ecommerce channel first
The outbreak may affect global supply chains, but the pandemic is expected to favor the ecommerce industry. According to a Quantum Metric report, online sales have surged 52% from the year-ago period, and the number of online shoppers has increased 8.8% since the outbreak began. While ecommerce will not solve every problem, having protocol in place may help.
2. Inform clients about business continuity
During times like these, information is key. Providing open and transparent communication with your clients regarding the status of your business continuity will go a long way.
3. Check out SBA loans
With many small businesses feeling the weight of the economy shutting down, there is a plea to the federal government for support. On average, companies with less than 500 employees have less than a month of cash reserves, so an influx of cash is desperately needed to survive. The U.S. Small Business Administration has set up Disaster Loan Assistance specifically related to the coronavirus outbreak. For information on the loans available and how to apply, please visit their website here.
4. Business interruption insurance
Many of you in the industry have business interruption insurance. While policies vary, you may want to immediately start doing the following: (1) carefully review your insurance policy, (2) track your losses and segregate claim related costs, (3) document cancelled orders, (4) document delayed orders (these also cost money), (5) monitor time spent on managing business interruption and claims, (6) track direct costs related to the outbreak, (7) track indirect costs, and (8) compare pre-coronavirus projections with actual results – save pre-coronavirus projections!
Another aspect to consider is “civil authority” clause in your coverage. Property policies typically include civil authority provisions. These address the “shelter in place” orders and might cover for lost revenues. Talk to your insurance broker.
5. Talk to your bank and ask for concessions
If you are concerned about paying certain credit lines, utilities or other items during this time, contact your creditors as soon as possible and ask for hardship concessions. This could include putting payments into forbearance (which should be a last resort as interest still accumulates) or making interest-only payments.
Banks including Capital One, Chase, Citi and Wells Fargo are encouraging their customers facing economic hardship to contact them to work out a strategy. Credit unions are also offering assistance and loan help. Additionally, hardship plans may be available, meaning lower interest rates or smaller fees and penalties for a time.
6. Utilizing Tax Credits for Loss Prevention
Under the new coronavirus relief bill signed into law on March 18, employers with less than 500 employees can receive some tax credit help. While employers initially have to foot the bill for the new sick and family leave benefits, some of the costs are refundable through tax credits against the payroll tax imposed on employers.
For the new sick leave benefits, the credit is limited to $511 per day for workers taking leave due to sickness or quarantine. The limit is $200 per day for workers taking leave to care for another person. Furthermore, the credit cannot surpass a 10-sick-day limit per employee.
For the expanded family and medical leave benefits, the credit is again limited to $200 per day, per employee. The credit cannot exceed $10,000 in total for any worker.
Employers receive additional payroll tax credits for group health plan costs for workers on COVID-19 sick or family leave.
7. Calculate your burn rate and model for a partial/complete shutdown
Now is the time to sit down and calculate your burn rate and model projections. Understanding your position financially and the rate at which you are spending will allow you to better strategize throughout the ongoing economic crisis.
8. Delay tax payments as much as possible
The IRS and Treasury Secretary Steven Mnuchin announced that Tax Day has been postponed from April 15 to July 15, 2020. The move applies to both filings and payments.
Similarly, the state of California pushed back both the filing and payment deadlines to match the IRS, accepting state tax returns and payments until July 15, 2020.
Other states have also extended their tax deadlines, for up-to-date information, please refer to the AICPA guide found here.
9. Cost containment
Now is the time to try different strategies of cost containment. For example, perhaps you can renegotiate rent. Chances are that your landlord does not have the next lessee lined up and waiting to take your spot. You may be able to negotiate a lower price – at least for the time being.
Another idea is to evaluate projects with external suppliers. Consider delaying or canceling orders as necessary. Some companies have implemented hours reduction and/or staff reductions over the next several weeks. Ultimately, you know your business better than anyone and you know the options most feasible for your situation.
10. Check out government (federal, state and local) assistance programs
The government is stepping in and trying to help. At the federal level, you have the SBA loan programs as well as stimulus packages. On top of that state and local governments are finding ways to help as well. The state of California provides a list of resources here.
11. Perform weekly cash flow projections
Stay on top of your financial situation with weekly cash flow projections. These projections will help you understand the money you expect to flow into and out of your business within a given timeframe. Understanding how the coronavirus pandemic may impact your business can help you make better, more insightful business decisions.
How can Squar Milner help?
At a time like this, we’re sure you have questions. Our team of Manufacturing & Distribution leaders are ready to answer them. Together we can navigate through the constantly evolving situation and design a plan that best suits your business.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.