Businesses across Florida and the United States are trying to figure out how to respond to the outbreak and spread of the coronavirus pandemic. Numerous public safety guidelines have been issued, and, although they will benefit the health of the larger community, there is an economic trade off.
Global supply chains have been disrupted for over a month. The U.S. stock market has been diving for weeks now, and last week tumbled into a bear market for the first time in 11 years. Federal, state, and local governments are taking steps to help forestall the economic effects of the coronavirus, such as lowering interest rates, but it’s yet to be seen how effective these measures will be. As always happens in these situations, though, small- and medium-sized businesses will bear the brunt of this economic blow.
Businesses need to develop action plans that involve both short-term and long-term response strategies. Most importantly, though, reacting quickly and decisively to potential business disruptions is the best way to avoid long-term damages.
Immediate Concerns
In the face of an impending crisis involving a pandemic, business owners will have varying concerns and worries, often depending on their particular businesses. For example, an electronics manufacturer may worry more about an interrupted global supply chain than a local bakery would. However, both the bakery and the manufacturer still face some of the same issues, including:
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Drop in Customers
Whether because they are following public health guidelines or have contracted the virus themselves, fewer consumers will be patronizing businesses.
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Obstacles to Production
Your employees may get sick, which will decrease your operating ability. Likewise, if your employees are getting sick, other business’ employees are too, which could put restrictions on supplies you need for your business.
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Loss of Revenue
With fewer customers coming into your store or with your team's inability to fulfill orders, your revenue will inevitably drop.
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Shortage of Cash
Unless you have massive amounts of cash on hand or are able to sell off assets, the lost revenue will lead to cash shortages.
Customer Communication
It’s vital that every business clearly communicate to its customers and clients their plan of action. Because we are dealing with a potentially life-threatening disease and not just a regular economic downturn, customers need to be reassured. Take time to inform them about:
- the status of your business,
- how you’re responding internally to the situation,
- what steps you’re implementing to ensure their safety.
Especially for retail businesses, a clear communications strategy is key to getting reluctant customers to continue to patronize your business.
Employee Communication
Don’t stop at the customer. Employees need to know the internal company policies being implemented as well. You want to ensure employees fully understand what the guidelines on sick leave, remote work, etc. are during a critical situation like this. If your employees get sick and can’t work, your production will suffer.
This employee meeting is also a great place to outline for employees the customer safety measures you are putting in place, to explain the rationale behind them, and to remind the employees to practice those policies while at work.
Let customers see employees washing their hands, practicing good hygiene, and cleaning the store. The small things that a business does for its customers often stand out the most in customers’ minds.
Furthermore, included in the new legislation passed in response to the coronavirus disaster were critical updates to paid sick leave and emergency family leave, which employers should stay informed about and are required to inform employees about.
Pro Tip
Restaurants, in particular, can really set themselves apart by advising their employees to be extra diligent. E.g. holding glasses and plates by the bottom, washing hands more often, not touching tables or chairs.
Wage-Distribution Ratio
Small businesses are always looking for ways to reduce their tax burden. One common method used by owners of S corporations is to play with the wage-distribution ratio to avoid paying payroll taxes.
Since distributions are not subject to payroll taxes like W2 wages, it’s clear why this strategy has appeal. Unfortunately, owners can be tempted to try to game the system and forego a reasonable salary in lieu of distributions to save even more on taxes.
Pro Tip
The tax code says that an owner must take a reasonable salary. If you don’t, the IRS can come knocking, reclassify thousands of dollars of distributions as wages, and leave you with an enormous tax burden.
If you don’t think this is a real problem, consider the 2005 report of the Treasury Inspector General for Tax Administration (TIGTA), which analyzed S corporation tax returns filed in 2000. The two most telling findings from that report, I think, are that:
- Of the single-owner S corporations generating over $100,000 of income, there were 36,000 returns filed where the owners took no salaries. These corporations passed through $13.2 billion to their owners free from payroll tax.
- Overall, the payroll taxes paid by single-owner S corporations were $5.7 billion less than what the self-employment taxes would have
No Money, Big Problems
There’s a bigger problem, though: Distributions are dependent on profits. You can always pay W2 wages, but you can’t always pay distributions. When the economy is roaring and business is good, this isn’t a problem. But as soon as the revenue stream dries up, so do distributions.
This can quickly become an untenable situation.
Let’s say you, an S corporation owner, currently have a monthly take home pay of $10,000, which is made up of $5,000 of W2 wages and $5,000 of distributions. Then, suddenly the economy takes a dive and your business goes with it. The cash flow is flat so you can’t take the $5,000 of distributions each month, which means your total take home pay has been cut in half. Whether you make $10,000 or $50,000 a month, cutting your current living standard in half will leave you in a tough spot.
Pro Tip
Creditors always get paid first. While some bills should be prioritized over others, distributions always come last. If distributions are made without sufficient money to pay creditors, the owners can be held personally liable.
Business owners can solve this problem right now, though.
We know that the economy is going to slowdown, at least in the short term. We also know that having fewer customers and clients will negatively affect your cash flow. So, before your bottom line takes that hit, revisit your compensation and change how you pay yourself. Make sure that if profits fall in the short term, you won’t be left in the lurch personally, with $10,000 in bills but only $5,000 in income.
And, in case you’re thinking, “I’ll just wait to change the ratio until later,” think again! Remember how I said the tax code states that owners have to take “reasonable” salaries? Well, changing your wage-distribution ratio after the fact signals as clear as day to the IRS that you were not taking a reasonable salary.
Act Now and Thrive
A decisive reaction doesn’t have to be an over-reaction. Owners and executives need to step up and be leaders in their organizations, especially in times like these.
Companies that wait to implement policies to address the large-scale health crisis caused by the coronavirus will be outstripped by their competitors. Not only will they feel the immediate economic impacts more acutely, they will be less resilient over the course of the economic downturn. If they survive a protracted recession at all, they will come out the other side too weak to recover.
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