Answers To Your Questions About Managing Cash Flow, Mitigating Risk During And After COVID-19

(Photo by Olivier Le Moal/iStock/Getty Images Plus.)

Eric Killian, owner of The Fitness CPA, along with Megan Allen, franchise and business consultant with Fran Promise, answered questions on May 20 in the town hall "How To Manage Cash Flow, Navigate Government Regulations And Mitigate The Risk Of Bankruptcy During And After COVID-19."

Time constraints didn't allow for all questions to be answered during the hour-long town hall, which is now available on demand here, but Killian took the time to answer in writing every question asked. You can find his responses below, divided by question topic. 

Funding, PPP, EIDL Questions

Q: Is it too late to apply for PPP?

A:  No, as of June 15, $140 billion remains waiting to be claimed.

Q: PPP forgiveness app – what’s needed to submit from documents side?

A:  Payroll records, 941s, 940s, utility payments, rent payment records, potentially proof of lease.

Q: PPP payback schedule?

A:  PPP funds not forgiven are paid back over five years at one percent interest.

Q: If you are a sole proprietor without payroll, is PPP still a good option?

A: Yes, absolutely. It’s 100 percent forgivable. Please apply as soon as you are able.

Q: I am a boutique cycling studio, and I don't have any employees, so I am interested in funding for my situation.

A:  If you have profits as a sole proprietor or partnership, try to apply for PPP. If you are ineligible for PPP, the EIDL loan would be your best option. And you may try both options.

Q: Just to clarify, owner draws (s corp) cannot be used for PPP money? What about bonuses? Doesn't seem fair to owners since we use both methods to pay ourselves      

A:  That is correct. Draws cannot be used in the PPP calculations. Bonus paid as wages through W2 may be included. I agree it is not compatible to those receiving PPP funds as partnerships and sole proprietorships.

Q: If we got approved for the PPP, what happens if we bring back our employees and run out of PPP funds if we have to remain closed longer than two months? Would they be able to go back on unemployment?

A:  Yes, your employees can go back on unemployment. This question seems to assume you’re paying employees to stay home and not work. We do not recommend this strategy.

Q: What is the tax impact of using PPP funds?

A:  Currently, the PPP money received is not income, but the expenses cannot be deducted and will be excluded from your tax return as a deduction at the end of the year. We expect this to be litigated, and it may change by tax filing season.

Q: Can we do the same with the PPP funds, just decide to use them as a loan and disregard the guidelines in order for it to be forgivable? A 1 percent loan is pretty good.

A: Yes, but you shouldn’t need to. With the new 24-week requirement, you should really aim for 100 percent forgiveness and use the EIDL loan at 3.75 percent over 30 years as your loan option. Applications reopened June 15.

Q: How to have PPP loans forgiven. And is there any action sole proprietors need to take with regard to the unemployment money that bridged the gap?

A:  This week, an expediated application was released for sole proprietors, and they are eligible for 100 percent forgiveness on a streamlined application. On the second question, you cannot use PPP funds and be on unemployment at the same time. I would cease claiming unemployment for the original eight-week period and then start claiming unemployment after the eight-week period passes.

Q: PPP usage, forgiveness requirements

A:  Four words and I could write pages. But essentially: PPP has to be used 60 percent for payroll over a 24-week period. The other 40 percent can be used on additional payroll, utilities, rent and interest payments.

Q: Payroll dates based on actual time or cash basis?

A:  Cash basis for the first payment, then accrual basis for the end of the period. Isn’t that crazy? It’s true.

Q: Will they be extending the PPP for businesses closed down by government? Our loan was funded on April 26, and the soonest we will be allowed to open is June 29 in Massachusetts.

A: Yes, for everyone the PPP deadline has been extended to 24 weeks from the date you received the funds.

Q: Does garbage service qualify as a utility under PPP?

A: Yes, but double check with your lender as we’re seeing some variations here.

Q: Please explain the full time equivalent. I have 28 employees—11 full time 17 part-time.

A: Anyone who works over 40 hours counts as 1.0. These are your full timers. For you, that’s 11.0.  Then, add all the hours of anyone who works less than 40 hours and divide by 40. This is the full-time equivalent of your part timers. Add this number to the 11.0 calculated previously. This is your full time equivalent (FTE).

Q: If my facility hires trainers as independent contractors, is there any way I can apply PPP loan proceeds to help offset the cost of retaining them? SBA guidelines seem to indicate I can’t use funds for their payment, that it’s not payroll expense.

A:  You may not use PPP funds to pay independent contractors.

Q: How do you handle issues of bringing back employees who do not want to give up their unemployment so that it does not impact your PPP on the amount of employees you bring back. Question 2: Can you hire new employees, and can PPP money be used toward new/different employees.

A:  We wrote a whole blog on that topic here. Yes, you can use new employees to replace old ones in order to meet the PPP head count requirements.

Q: Chances that PPP will change the percentage paid out to employees

A:  Yes, it changed to 60 percent, and the period was extended from eight weeks to 24 weeks.

Q: You are talking about payroll forgiveness as though 100 percent of payroll costs are forgivable, but per FR 85 20811 that doesn't seem to be the case. Comments?

A:  I’m not certain which part of the interim final guidance you are referring to. Not ALL payroll costs are forgivable. Wages over $100,000 are not forgivable, wages for owners above their average pay in 2019 are not forgivable, and employer social security and Medicare wages are not forgivable.

Q: On PPP, any word on whether we can track spending when we choose and if it was extended to 12 weeks vs. eight to spend the money on payroll?

A:  I’m unclear what your first question is asking. The forgiveness period was extended from eight to 24 weeks.

Q: If you or someone was making more than $100,000, can you pay yourself that amount or is it capped at $100,000?

A: You can pay yourself more, but only the amount up to $100,000 annually prorated for eight weeks (100,000 / 52 x 8 = $15,384) will be included in your PPP forgiveness applications.

Q: If I am the business owner but I haven't been paying myself, can I now add myself as an employee?

A: Yes you can pay yourself. The amount of your pay that will apply towards PPP forgiveness is limited to an eight-week average of what you paid yourself in 2019.

Q: What is the best way to utilize the SBA programs offered? Spend PPP money so it can be forgiven or utilize the low interest loan to maximize cash flow?      

A: Yes, but you shouldn’t need to use the PPP funds as a loan. With the new 24-week requirement, you should really aim for 100 percent forgiveness and use the EIDL loan at 3.75 percent over 30 years as your loan option. EIDL applications reopened June 15.

Q: EIDL $10,000 loan we applied for we didn’t even know we received until checking our checking account and there it was. We had applied for the PPP without knowing we got EIDL and received that. We haven’t spent the $10,000 because of that. Will we owe?

A: You will owe $10,000 of PPP funds back. Paid back over five years at 1 percent interest. They made it so you don’t pay back the EIDL funds, but instead pay back the same amount to the PPP lender.

Q: If my credit is locked, will I be eligible for an EIDL loan? I received a $10,000 grant and a notification that there was a credit attempt, but nothing else.

A: You must unfreeze your credit in order to be approved for the EIDL loan.

Q: My general manager and fitness director were temporarily laid off on March 17. Gym still closed due to state mandate. Can I pay myself and my business partner as acting general manager and fitness director while closed? We are doing the work of both of them since we cannot afford to bring them back during closure. The general manager may not come back anyway.

A: Yes, you can pay yourselves. The amount of your pay that will apply towards PPP forgiveness is limited to an eight-week average of what you paid yourself in 2019.

Q: Do the EIDL loans have as many rules on how they can be spent like PPP does, and if so, what are those guidelines?

A: You can use EIDL funds on operational/working capital expenses. Rent, payroll, operating expenses, existing loan payments are fair game, too. But you may not refinance or pay down existing loans by more than your regular monthly payments. You are also prohibited from distributing EIDl funds to owners as distributions.

Q: What do you have to use the EIDL funds on? If I have debt from a recent expansion, can I use it towards that, credit card bills/loan?

A: You can use EIDL funds on operational/working capital expenses. Rent, payroll, operating expenses, existing loan payments are fair game, too. But you may not refinance or pay down existing loans by more than your regular monthly payments. You are also prohibited from distributing EIDl funds to owners as distributions.

Q: Not approved by SBA disaster loan. What options?

A: Appeal, appeal, appeal. There are instructions for how to appeal in your denial letter.

Q: Still going to try for an EIDL if the money is appropriated in this next package and that it’s not just for agricultural businesses like this last one...Sooo, question is, will the rules on forgiveness on the EIDL be the same as they have been or different?

A: There is no forgiveness on EIDL funds. These are a 3.75 percent loan, up to $150,000, paid back over 30 years.

Q: EIDL at 3.75 percent over how long?

A: The EIDL loan is 3.75 percent paid back over 30 years.

Q: Do you see any affordable funding/loan relief in sight for the over 500 employee companies

A: I’m not familiar with those solutions. Very sorry. But the 500-employee limit is per location, not per company. I would be surprised if you had 500+ employees at one location, so you should double check. You may qualify for PPP and EIDL.

Q: Where do I apply for the SBA EIDL funds?

A: Here is the SBA EIDL link.

Q: Has anyone received any money from the SBA

A: Yes, lots of EIDL funds have now been disbursed and EIDL applications reopened June 15.

Q: Have businesses started to receive SBA's EIDL assistance?

A: Yes, lots of EIDL funds have now been disbursed and EIDL applications reopened June 15.

Q: The economic injury program is only accepting requests for agricultural needs.

A: Applications reopened June 15. You can apply here.

Risk Management

Q: Should we update our waiver of liability regarding Covid?

A:  Absolutely. Your insurance agent should be ready and able to help you update your waiver.

Q: Should we have all members/staff sign a waiver to protect the gym from any lawsuits?

A: Yes, absolutely. Your insurance agent should help you put together a new liability waiver.

Q: I have a good idea about risk mitigation from a health perspective. I am not as confident about risk mitigation from a legal perspective. What legal precautions should small businesses take as they develop reopening strategies?

A: Speaking with an attorney and insurance agent would be your best bet here.

Working With Vendors, Landlords

Q: We have heard that credit card processors will be holding back up to 10 percent for 30 days in anticipation of higher card declines.

A: We have heard this, too, right when businesses have been hit hard. We recommend appealing any withholding.

Q: What is the suggested approach in getting late fees waived during this time?

A: Call your vendors and work with them. Most are being very reasonable during these times.

Q: Are you finding that many fitness club operators are having success achieving long-term rent reductions or just short term deferments and abatements?

A: Great question. We answered this in detail on the webinar, but the short answer is that we are seeing mostly short-term deferments and abatements.

Q: How would you approach a landlord who is not willing to abate any rent during the shutdown, which is made even more troublesome by knowing he is getting mortgage payments deferred?

A: We wrote a blog on this topic here.  Get a moratorium so you don’t default, be persistent but kind, show him your economic injury by sharing your financials and projects of the future.

Generating Revenue, Recouping Losses

Q: Creating new revenue streams.

A: We wrote a guide on eight proven ways to boost your revenue, which you can access here.

Q: I hopefully will have 50 percent of my clients return to train. I’m in Pennsylvania, so as it looks today August to September will be our official opening for fitness studios. What is the best tactic/approach in marketing to attract new business? Any strategies you suggest?   

A: We would recommend consulting with a marketing company to tailor this strategy for your business and locality.

Q: Marketing or sales ideas to build back membership base?

A: We would recommend consulting with a marketing company to tailor this strategy for your business and locality.

Q: A significant portion of our revenues have come from insurance-subsidized older group exercise classes. With the fears of COVID for the elderly, how do we regain that revenue stream?

A: We wrote a guide on eight proven ways to boost your revenue, which you can access here.

Q: Additional revenue stream ideas?

A: We wrote a guide on eight proven ways to boost your revenue, which you can access here.

Q: COVID-19 is a destroyer. How is it possible for losses encountered to be regained?

A: It will be hard to replace lost income. We recommend that you focus on the success you can have in the future. Perhaps the industry will be thinned a little. An Anytime Fitness location we work with is benefiting from a 24 Hour Fitness Club closure and signed 120 members this week alone. Stay positive!

Q: Do you see BI (business interruption) insurance as a possible revenue source down the road?

A: Yes, but many policies have exclusions for viruses and natural disasters. Call your insurance agent to see if your policy will pay out.

Q: At what percentage of capacity for a big club do you feel is not financially worth opening up amid the pandemic?

A: I recommend modeling out scenarios and work with your accountant to do a cost-benefit analysis. At a certain point, it won’t be worthwhile to open at limited capacity. But there are also expectations in your community for you to reopen or you may struggle to keep members.

Q: How do you make projections for the six to 12 months without knowing what the scenario will be with the virus?

A: We start with what we know, and we create a best case, a moderate case and worst case scenario. A range of projections gives us the best information, and we adjust each month as we get more information.

Q: Will COVID-19 surcharges be a potential solution to cover extra costs incurred by club owners for cleaning protocols and extra staffing? Will it be accepted by members to ensure a safe environment?

A: Yes, anything is on the table as a solution. Like any surcharge, some members will complain and most will accept it. I recommend quantifying the actual cost of supplies and cleaning staff to see if it’s worth the public relations headache.

Q: How to manage the cash flow after COVID-19?

A: Create a budget, create projections and update them every month. If your projections say you are cash flow negative, figure out how you will come up with the cash to fill the shortfall and for how long can you go on making up the shortfall. 

Billing Questions

Q: Some facilities continued to charge during the shutdown; some did not. Do you have a feel for the breakdown between the two? And for those facilities that continued to charge, do you have a sense of negative impact or PR associated?

A: We don’t. It’s a total mixed bag. We believe many boutique studios continued to charge. We have not seen a negative impact for those who continued to charge or negative PR. Of course, there are isolated cases, but most of our clients who continued to charge were sure to give members the option to opt out of billing and are refunding anyone who asks.

Q: How are the various operators handling dues—billing, not billing? Consent to bill and giving services credit for money billed?

A: Good communication with your members is critical before you begin billing again. We believe offering an extended freeze period will be best. You don’t want the PR issue, and ideally, when all of this passes, those members will have had a good customer service experience and will come back as members. Keeping them locked into a contract during these times will only help you in the short term and hurt in the long term. Definitely offer credits for those who are upset or unable to come in and willingly put membership on hold when asked.

Q: Do you anticipate a large number of members who pay monthly dues and annual fees but never come to the gym to cancel their memberships, and what impact is that likely to have on business models?

A: Great question. We do expect this and have seen it occurring. I expect this will only be an issue in the short term. Once members start attending again, we will refill this bucket of clients with new members who pay and do not attend. I expect there will be lots of new members hoping to get back in shape after staying at home too long who will help to make up for those who cancelled.

Q: What should we do when we reopen if we bill automatically but people aren’t comfortable coming back or they don’t want to, etc.?

A: We believe offering an extended freeze period will be best. That way, you won’t want the PR issue, and ideally when all of this passes, those members will have had a good customer service experience and will come back as members. Keeping them locked into a contract during these times will only help you in the short term and hurt in the long term.

Training Questions

Q: Are club considering virtual memberships? If so, what software are clubs using?

A: Sorry, I don’t know the answer to this question.

Q: How will personal training change?

A: More small group training at higher prices will win.

Q: Pricing difference for virtual personal training vs. in-person personal training?

A: I would try to charge the same for both types of training. It’s the trainers time, expertise and accountability they are paying for. I work virtually with my trainer and pay the same. It is worth it. Once the gym reopens, you may consider pricing virtual slightly lower than in person.

Q: To what extent do you believe we will still see fitness-at-home options as we slowly reopen fitness facilities? 

A: Fitness at home will work for a small minority. Most require accountability and a space where they can be in a fitness mindset.

Unemployment Questions

Q: One of my colleagues was offered a job to return to but not the same job and much less pay. Can she say no thanks and still collect UI?

A: Each state varies. She should check with her state unemployment office. Generally, we understand this could be an issue in most states where they could decline an offer that is substantially different than the one they had previously.

Q: How do you navigate bringing people back who make more on unemployment that we may only need them now part time instead of full time?

A: This is admittedly a hard one. You offer them their jobs back. If they decline without cause, they may be ineligible for benefits. We blogged on this topic here.

Reopening Questions

Q: When and how do you anticipate large multipurpose facilities opening in the future?

A: Each state will have its own specific guidelines.

Q: Are clubs opening without the consent of their local government?

A: Yes, we have seen this happen, and it’s been in the news, too.

Q: The HVLP model is based upon member volume. How will the new guidelines [work] which include limiting numbers of guests in facilities?  

A: At first, some members will not want to come in so we may not have capacity issues like you seem to be suggesting. But if we do have those capacity issues it’s possible to charge a premium though we would think long and hard before doing this as it could erode an otherwise loyal customer base. If you can, we recommend keeping prices the same at this time and reassess every month as the landscape is changing.

Q: How do we address the need for continued physical distancing when equipment cannot be realistically 6 feet apart?  Should we rearrange and move some equipment out of the workout areas?  Should we limit the number of people in any work out?               

A: We have seen studios either move equipment somewhere else (a total pain) or rope off every other machine.

Q: Due to the volume turn out expected on reopening of gyms, can we expect more gyms to expand their opening hours to 24/7 to accommodate members?

A: We haven’t seen this happening yet. There are too many concerns with staffing to clean. In fact, we’ve seen reduced hours to enable more cleaning.

Club Bankruptcy Questions

Q: What is the situation for the Gold's Gym bankruptcy, and how does that differ from an individual filing bankruptcy?

A: They are reorganizing rather than liquidating. I means they are making deals with creditors, getting rid of some assets, and restructuring so that they can have a better chance to pay a portion of their debts in the future (rather than paying none of them in a liquidation).

Q: How will the pending bankruptcy of 24 Hour Fitness affect the industry?          

A: It may create space and send members to other fitness concepts. An Anytime Fitness location we work with is benefiting from a 24 Hour Fitness Club closure and signed 120 members this week alone. Stay positive!

Miscellaneous Questions

Q: What are the top three unemployment laws I should be concerned about?

A: Determining if you are an at-will state, learning how to respond to a state unemployment claim timely, and learning how your state wants you to bring back and report workers declining work. We wrote more on this topic here.

Q: How long do you anticipate the recovery process to take?

A: It’s hard to say and is a better question for the economists and doctors. A strong therapeutic and a vaccine will change the tide significantly.

Q: How can we retain members in this uncertain time?

A: We could write a book. All normal retention strategies apply, but virtual options are the leading way to retain members. Nutrition coaching. Wellness check-ins. Online happy hours. These ideas are more operations focused than we normally consult on, but you get the idea.

Q: Besides offering virtual classes, how are you engaging members during this time?

A: Nutrition coaching. Wellness check ins. Online happy hours. These ideas are more operations focused than we normally consult on, but you get the idea.

Q: How does this pertain to the non-profit sector?

A: Sorry, we are not familiar with non-profits.

 

 

 

 

 

 

 

 

 

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