A Three-Pronged Route to Post-Pandemic Business Recovery
As we’ve been reminding our clients since COVID-19 first appeared, there’s no need for printing and packaging business owners to abandon their long-term strategic plans while they deal with the near-term realities that the pandemic has brought. In fact, making the right responses now could leave a business in better shape for the future than it would be if nothing had happened and the need for change hadn’t been as urgent.
This is consistent with the duty of a business leader in good times as well as bad: to take whatever steps are necessary to insure that the organization survives. As we see it, business owners have three priority tasks ahead of them in the present circumstances. These are protecting the health and well-being of their employees; securing financial assistance from the Paycheck Protection Program (PPP); and managing head count in the interest of greater profitability for the company.
First on the list is to keep employees safe by following mandates and protocols for preventing the spread of COVID-19 in the workplace. The COVID-19 Resource Channel from PRINTING United Alliance, its PIA affiliates, and NAPCO Media offers valuable advice along these lines.
As conditions return to normal, owners can broaden the focus to include safeguarding the health of their businesses. We think they have an exceptional opportunity to strengthen their financial positions by taking correct advantage of the PPP, a relief package established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
By now, the PPP is well known as a provider of forgivable cash loans for struggling businesses and, sometimes, as a source of confusion and frustration for business owners seeking its assistance. Fortunately, an amendment called the PPP Flexibility Act (PPPFA) aligns its terms and requirements more closely with the actual needs of business owners, making it a friendlier resource to work with.
Wider Window for Recipients
One of the most important changes is that those who qualify for loans now have 24 weeks over which to use the money – three times as many weeks as applicants were given in the beginning. Those who received their disbursements prior to the PPPFA adjustment can either keep their original eight-week term or opt for the longer period, which concludes on December 31, 2020.
Another beneficial change is that it’s no longer mandatory to spend 75% of the loan amount on payroll in order to qualify for forgiveness, a requirement that many owners saw as unrealistic. Now, the stipulated set-aside for payroll is 60%, leaving the remainder to be used for the other eligible expenses: rent, utilities, and mortgage interest. PPP applicants can receive loans worth up to two-and-a-half times their average monthly payroll costs, subject to restrictions.
The program’s most notable feature is its forgivability. This occurs if the average number of full-time equivalent (FTE) employees per month remains the same at the loan’s FTE measurement date as it was in an FTE reference period prior to receipt of the funds. Then, the loan is 100% forgivable.
Borrowers can choose either of two FTE reference periods to compare against: February 15, 2019, through June 30, 2019, or January 1, 2020, to February 29, 2020. You have several options for choosing a measurement date, the latest of which is December 31, 2020.
Maintaining the original FTE count at the FTE measurement date is the best-case scenario, as it may fully eliminate debt. If the FTE count is smaller at the measurement date, forgiveness is reduced proportionately, and the loan recipient will have to repay the difference – but at a very low rate of interest, and with up to five years to settle.
How Not to Use PPP Funding
This is a simplified explanation of how PPP lending works. Owners are urged to consult with their accountants to forecast eligible expenses and to find ways of maximizing FTE counts at the FTE measurement date. It is precisely here that we see the opportunity to tie PPP support to the third priority: management of labor costs. We regard this as the single most important step a business can take to protect its profitability not just now, but in the post-COVID rebound to come.
We recommend continually taking an objective look at staffing and making the necessary decisions about which positions are and are not essential to the functioning of the business. We know that some company cultures don’t permit laying off employees, and we respect those sentiments. Keeping everyone on the payroll is acceptable as long as it doesn’t threaten the company’s survival. Unfortunately, and especially in a business climate like the one we are now in, survival and head count preservation can be incompatible objectives.
This makes it a mistake, in our view, to maintain staffing at 100% when sales are significantly less than 100% of normal. An even bigger error would be to try to cover payroll for non-essential positions with a PPP loan.
Why? Because eventually, that money will be exhausted, and though the loan may not have to be repaid, forgiveness comes at the price of keeping positions that the business does not need – and thus act as a drag on profitability. Since there is no sure way of knowing what business conditions will be like at the end of the loan period, those positions could be just as burdensome to the company as they were when it began.
A better response would be to make judicious staff cuts now, forecast expenses and loan eligibility on that basis, and rehire those positions later – a tactic that leaves the door open to resuming full staffing when business conditions are better.
Simple, but Revealing
All of this is done with an eye toward maximizing value added per dollar of payroll, the metric recognized as the best predictor of how profitable a business is going to be. To calculate it, divide sales (less materials, supplies, and outside services) by payroll expense (including commissions, temp labor charges, payroll taxes, and fringe benefits).
It’s a simple measurement that everyone can understand, and it provides clear benchmarks for profitable performance. In the printing and packaging industries, the baseline for profitability is having about $1.50 worth of value added for every $1 of payroll expense. Profit leaders do even better, often achieving ratios on the order of $1.85 : $1.
This formula makes it easy to see the interrelationship of staff size, payroll expense, and value added in determining profitability. If a company’s ratio was favorable in 2019, that should remain the target to hit this year. Our advice to recipients of PPP funding is to continue to manage labor costs as if the funding had never been available – up to, and including, making workforce reductions where they can be justified for the long-term good of the company.
A Waste, Where Not Needed
No one enjoys terminating or furloughing employees. But, business leadership requires making tough decisions in tough times in order to keep the organization viable. Remember that right now, federally supplemented unemployment benefits are generous. When holders of non-essential positions can replace – and sometimes even exceed – their salaries with unemployment compensation, using PPP funding to artificially subsidize those jobs doesn’t make sense for anyone.
If there is anything good to be said about having to run a printing or a packaging company during a viral epidemic, it is that the slowdown affords more time for reflection and planning than owners usually get under normal operating conditions. We recommend using the time to think deliberately about staffing and what it will mean for doing business profitably in the new normal now taking shape around us. As always, New Direction Partners stands ready to help.