It is hard to believe, but we are in week 19 of our new COVID-19 reality. Everyone seems to be looking forward to this illusive “new normal”, and we suppose in some ways an element of normalcy is back. We are seeing a lot of our entrepreneurial clients bounce back into action. It is such a privilege to be working with such a resilient group of people. In some ways, this resiliency inspires us to try harder and be better, so thank you for providing this never-ending supply of inspiration!
We wanted to use this opportunity to highlight the recently released legislative proposal on the extension of the Canadian Emergency Wage Subsidy (CEWS), as well as emphasize the importance of regular and robust cash-flow projections.
CEWS Updates
The CEWS remains an important component in businesses’ ability to recover from the effects of the pandemic. The news on the subsidy being extended to the end of August has been out for quite some time. Just recently, the government announced that the subsidy will be in effect until December. This is very welcome news, but until last Friday, there was a lot of uncertainty on what the new eligibility criteria would look like from July 5 onwards. Business owners are worried about how the pace of recovery might affect their ability to access the wage subsidy.
The legislative proposals released on July 17, although not enacted into law yet, provide some clarity, so we thought we would provide a high-level overview.
The proposal addresses claim periods 5 through 9 (July 5, 2020 to November 21, 2020). It includes a number of significant revisions, most of which are designed to address concerns shared by the business community. Unfortunately, these changes come with a fair bit of added complexity, which may lead to added confusion amongst the business owners.
Starting July 5, the subsidy has 2 components – a base subsidy and a top-up subsidy (the rates we outline below are applied to the eligible remuneration paid up to a maximum of $1,129 per week, per employee)
The base subsidy is available to all employers that experience a decline in revenues (the 30% minimum decline no longer applies). The maximum base CEWS rate is available to employers with a revenue drop of 50% or more. The subsidy gradually reduces from 60% in periods 5 and 6 to 20% in period 9. Employers with a revenue drop of less than 50% are eligible for a lower base CEWS rate that is gradually phased out as the revenue drop percentage declines from 50% to zero.
The top-up subsidy is available to eligible employers that experience a revenue drop exceeding 50% when comparing i) revenues in the preceding 3 months to those in the same months of the prior year; or ii) average monthly revenue in the preceding 3 months to the average monthly revenue in January and February 2020; the maximum top-up CEWS rate is 25% for employers with a 3-month average revenue drop of at least 70%.
The maximum combined amount of the subsidy is 85% in periods 5 and 6, 75% in period 7, 65% in period 8, and 45% in period 9.
Confused yet? Each claim period comes with its own set of eligibility calculations, which we will work on streamlining to make planning and analysis easier.
For now, let’s walk through 2 examples:
Example 1
A hair salon was closed completely until July 5. Their revenues from March 15 to July 5 have been $Nil. Since re-opening, they operate at 80% of last year’s revenue. How much wage subsidy can they get for period 5 (July 5 to August 1)?
Base subsidy – the revenue in July is down 20% compared to the year prior. The program allows us to use the greater of the decline in revenue for July, and the month prior. In this case, the month prior, the decline was 100%, so the business can access the maximum base subsidy amount of 60%.
Top–up – for the July claim, we need to compare average monthly revenue for April to June 2020 to the same period in 2019 (there is also an option to compare to the average of January and February of 2020). Since the business was closed completely, the decline is 100%. Therefore, the maximum top up is available at 25%.
The combined subsidy amount is therefore 85% of eligible wages paid – very welcome support for a business in an industry devastated by the pandemic.
Example 2
A construction business, who did have to close in March and April, but things turned around and they have been operating at 80% of normal revenue May onwards. How much can they get for period 5 (July 5 to August 1)?
Base subsidy – the revenue in June and July were down 20% compared to the year prior. We cannot access the maximum subsidy. The amount of base subsidy for period 5 is 1.2*revenue drop% (20%)=24%
Top–up – for the July claim, we need to compare average monthly revenue for April to June 2020 to the same period in 2019 (there is also an option to compare to the average of January and February of 2020). The business was closed in April, and went back to 80% of revenue since. Our average monthly drop is (100%+20%+20%)/3=46.7%. Since the revenue drop does not exceed 50%, the top-up subsidy is not available.
The combined subsidy amount is 24%. Interestingly, under the existing subsidy provisions, the business would not receive any subsidy, since it is not able to demonstrate a decrease in revenue of more than 30% in June or July.
We should note that the proposal includes a safe-harbour provision for periods 5 and 6 (July and August), which allows you to claim the greater of what you would be eligible for under the existing provisions or the new provisions.
Also of note, is the fact that employees who were without pay for more than 14 days in a claim period are now eligible for the subsidy (period 5 onwards).
Lots to digest here, but at the very least, we hope this provides an idea of what the CEWS eligibility and calculations might look like once passed into legislation. As always, we are here to help decipher things, if needed.
Cash Flow Projections
The last few months have tested our businesses on many levels – how strong and resilient is your team? How loyal and resilient are your customers? How creative and adaptable is the leadership team? How tight is cost control? How easy is it to get access to liquid cash to keep the lights on? And although we appear to be steadily recovering from the past few months, most people are keenly aware of the possibility of a second wave.
If there is one thing we learned over the past few months, cash flow management has been a hot topic for many. Businesses that adjusted the best were those who understood that keeping a business afloat requires access to cash (to cover fixed costs and fill orders as they come in). These businesses prepared long-term cash flow projections, figured out whether existing lines of credit were enough, and applied for more credit to cover any projected shortages. Thankfully, banks provide EDC-guaranteed loans for small businesses, which helped to bridge the gap.
It is better to ask for credit when you have lots of cash, not when you have run out. Take some time aside to analyze your current cash flow situation and your monthly cash flow needs – consider a couple scenarios – what if business stays as it is, what if it drops, what if my customers take longer to pay. For each of these scenarios, run a monthly cash flow projection for the next 6 months. Is your existing line of credit enough to get you through a rough patch? If your line of credit is linked to AR and inventory, consider what your limit will be. This analysis should be rolled forward monthly, until things stabilize permanently.
We are working on putting together a robust template we can share with our clients to help make this process easier. If you are interested in getting your hands on this tool, please contact Ana Rebro @ anastasia@farnhamco.ca.