This article appeared in the October 2020 issue of MiMfg Magazine. Read the full issue and find past issues online.

COVID-19 has had a significant impact on Michigan manufacturing, forcing many to shift strategies to cope under crisis. The combination of supply chain issues, workforce concerns and reduction in orders created a “perfect storm.” Fortunately, many manufacturers are surviving the initial challenges through lines of credit, low interest loans and government programs such as the Paycheck Protection Program and Economic Injury Disaster Loans.

The pandemic caught many manufacturers off-guard resulting in trying circumstances. The best way to ensure resources are protected is to develop a comprehensive plan for the next 12 to 18 months.

• Cash Flow Planning: Create a 13-week cash flow model to provide insights into the assets, debts, expenses and income over the planning period. The model should be detailed and regularly updated to help management make timely and necessary decisions. It should clearly communicate the financial situation to all stakeholders.
• Receivables & Payables: It is essential to manage customer collections and vendor payments with the goal of reducing the time to get paid while increasing the time to pay vendors. Ideas include modifying invoice payment terms or offering payment plans or discounts for upfront cash payments. Prioritize critical vendors when making payments.
• Inventory Management: Avoid carrying non-essential inventory by taking time to extract data and analyze inventory to identify where changes can be made. Converting unused inventory into cash could be key to long-term survival.
• Liquidate Idle Assets: You may have untapped equity in assets not utilized, underutilized or ineffective in financing due to reduced advance rates. Review is recommended to realize additional sources of cash liquidity.
• Leasing vs. Buying: When contemplating the purchase of new equipment or machinery, evaluate financing options. Rather than draining cash for purchases or upgrades, work with vendors to obtain the best financing possible to protect valuable assets and lessen the cash impact.
• Employer Retention Tax Credit: Take advantage of this credit rewarding businesses for retaining staff. The value is equal to 50 percent of wages paid to qualifying employees between 3/12/20 and year-end.
• Employer Payroll Tax Delay: For immediate savings, defer the employer portion of the Social Security Tax by the end of the year. Fifty percent of deferred taxes need to be repaid before 12/31/21 with the balance due 12/31/22.
• Net Operating Loss Carrybacks: As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, tax regulations were changed to allow realized losses in 2018, 2019, or 2020 to be carried back for five years. This allows businesses with a loss last year or in the prior year to apply the loss against income; possibly leading to an immediate tax refund.
• Tax Estimates: Most profitable businesses default to 100 percent or 110 percent of prior year tax as a “safe harbor” from underpayment penalty and interest. It may be worthwhile to shift to the 90 percent of current year tax safe harbor method despite requiring detailed quarterly tax computations.

Looking forward, it is imperative to assess the company’s financial position and develop plans to facilitate recovery.

Clayton & McKervey, P.C. is an MMA Premium Associate Member and has been an MMA member company since February 2018. Visit online: www.claytonmckervey.com.

About the Author

Jim Biehl is a Shareholder at Clayton & McKervey and leads the firm’s Manufacturing & Distribution practice. He may be reached at 248-936-9409 or jbiehl@claytonmckervey.com.