3.25.20 | Practice Made Perfect – COVID-19 Update
As the U.S. Government, including local state authorities, work to get a handle on the spread of COVID-19, businesses are grappling with managing the resulting financial burden. The most recent response to the ever-growing numbers of COVID-19 cases in New York State is the “New York State on Pause” executive order issued by Governor Andrew Cuomo, which calls for the 100% reduction of nonessential workers, which was effective 8:00 pm on Sunday, March 22.
In New York, Law firms did not make the list of essential services under the executive order. However, although firms were not mentioned directly, the order did include services related to the financial markets and law enforcement, which can include certain law firm practices. Additionally, courts will remain open for emergency and essential matters.
With their office doors forced to close, firms require a robust teleworking technology system, with secure and accessible data in place, in order to keep their workforce busy and servicing clients, albeit virtually. For firms that have not successfully embraced digital transformation, this executive order will inflict extreme hardship. Many small- to mid-size firms fall within this category. However, make no mistake, most firms will be faced with a negative impact as a result of the numerous regulations and mandates put in place to mitigate the COVID-19 threat.
The most critical concern we hear from law firm clients as they try to manage the business of law in these unprecedented times is cash flow. With the potential of decreased revenues and staff, and expenses remaining the same, many are questioning how they can generate more? The answer to this question varies for each firm, but the following describes some options that firms should consider exploring as they search for ways to continue and sustain operations during the health crisis.
Communicate your situation with landlords and ask for appropriate forms of relief, including rent abatements, rent deferrals, or the possibility of applying security deposits to current rent payments if cash flow is tight. Review your agreements for guarantees and good guy clauses. (Communicating your cause may include demonstrating financial hardship and cash flow impact.)
Tax savings or payment delays
The Federal Government, as well as many state jurisdictions, have extended corporate and individual income tax deadlines and waived certain tax payments, including for estimated tax payments. Stay in contact with your tax advisor to remain updated on current tax related announcements.
Adjustments should be made to estimated tax payments to be in line with firm performance as the year progresses, instead of basing amounts on 2019 liability.
Additionally, there may be opportunities for NYC firms to save on the Unincorporated Business Tax (UBT) liability, which is based on revenue sourced inside the city. For those firms with teleworking staff located outside city limits, an argument can be made that less revenue is being sourced from within the city, resulting in a NYC UBT savings. So be diligent in tracking staff teleworking activities.
Available lines of credit
Consider drawing from any available lines of credit currently in place. Speak to lenders or financial advisors to determine if any penalties would incur if the lines contain any terms of withdrawal fees or maturity clauses.
Evaluate budget to identify savings
Take this opportunity to review your budget to identify areas, or initiatives, that can either be reduced, postponed, or eliminated. These areas can include:
- Marketing campaigns or advertising
- Planned networking events or conferences
- Firm and staff association/organization memberships
- Charitable donations
- Business development training programs
- Internal events (partner retreats or holiday parties)
Firm executives will have to make some hard decisions regarding staffing if cash flow is heavily impacted by the COVID-19 pandemic. With mass layoffs being the last resort, firms need to do their best to mitigate such extreme measures and should consider other alternatives first, including:
- Offering flex time or part time to certain support and resource staff
- Enforcing a hiring freeze
- Salary reductions
- Equity partner percentage reduction in draws
- Reduce or eliminate profit sharing contributions
- Elimination of paid internship programs
- Mandatory Personal-Time-Off usage (this would also ensure full staff is available once work returns to normal operations)
- Monitor potential impact of federal or state legislation intended to assist affected businesses
Although these options may also lead to difficult discussions, it would be a preferred tactic, for both the staff and firm leadership, over a permanent layoff plan.
As the U.S. Government passes relief bills to mitigate some of the impact to businesses and families, such ongoing legislation should be closely monitored and considered when making any short- and long- term staffing decisions.
Nonessential bill payments
Consider slowing payments, deferring, freezing or eliminating certain payments of nonessential services bills.
Given the fact that the COVID-19 pandemic is an unprecedented situation, each firm needs to determine the best approach for them to survive the crisis. Exploring ways to generate more cash flow and leveraging the resources available, which includes your Berdon Relationship Team, to help do this will enable firms to reduce the impact that COVID-19 is having on their business.
Berdon LLP, New York Accountants