Mar 17, 2020
Cash Emergency Plan 2.0
Written By: Nate Williams
With each passing day we learn more info about this “New COVID-19 World Order” that we live in. Our hope is to be as helpful to you as we can during this time. Here are some additional thoughts to share that we hope will be helpful:
What should I do?
Financial principles don’t change; the application of those principles – the strategy you should employ – will depend upon your circumstances. Some of our clients continue to operate their practices and don’t plan – at least for now – to shut down. If you’re open for business as usual, keep going as long as you can. Even in these circumstances, we recommend caution against the day when you do get shut down.
But if your office is shut down, you’re in a completely different camp and you should employ an emergency cash strategy. The rest of this email is directed toward those whose offices are shut down, or who will eventually need to shut down.
Water in the desert
We constantly compare cash to water as we’re explaining the importance of cash management to our clients. Your practice is like a well, pumping cash to the rest of the financial system. But if the well is dry – like it is when your practice is closed – think of yourself as if you were in the desert with a limited supply of water…and you don’t know how long you’re going to be there. Every decision you make should be geared towards cash preservation – every drop matters.
Should I continue to pay my employees?
As mentioned yesterday, I think you should do what you can to help your employees through this crisis; this might include paying them some for not working and it will absolutely include providing leadership and compassion. But you need to be wise. Here are some ideas that might help:
- I do not think you should pay your employees their full wage for doing nothing. If your office is closed and one employee is at home on a Netflix binge, I wouldn’t pay 100% of her wage. Are there things your employees can do of value for you that you could pay for? If so, employ them to do work.
- I recommend you contact myPay and have them NOT withhold taxes and 401(k) contributions for your employees. Of course the employee will need to know about and agree with this. Remember, we’re in the desert with limited water. Technically, your employees should fill out a new W-4 form – just have them write “exempt” on the form if they want nothing taken out. (Form W-4 here).
- Many states offer unemployment benefits during emergencies even if the individual is still employed. You or your employees should contact the state unemployment department to learn what benefits are available. And if your employees qualify, take advantage of those benefits.
Should I continue paying my practice loan to avoid the interest?
If you haven’t done so already, contact your bank to ask them if they will allow a deferment of loan payments. Most banks will do this. Yes, you’ll have to pay some additional interest, but it is well worth it. If they won’t voluntarily accept a deferment of payment, in some limited circumstances you may be forced to not pay them. This is not ideal, but better than leaving you broke.
Assume that your bank loan is at 4.5% and your monthly payment is $8,000. Now assume that of that payment, roughly $5,000 goes towards principle and $3,000 goes towards interest. If you don’t make one month’s payment, the $3,000 of interest will be added to your loan – this isn’t lost money, remember that it’s money you didn’t pay. The next month, the additional interest charged will be $11.25 ($3,000 additional interest x 4.5% / 12 months). So in this case, you saved cash flow of $8,000 for a monthly charge of $11.25.
Don’t I want to keep investing while the market is down?
If you’re fortunate enough to still be operating your business as usual, then yes, this is a great buying opportunity. And as long as I live, you will never hear me advise anyone to sell when the market is down (unless you need the cash for food).
But if you’re shut down and in emergency cash mode, you’ll likely have to watch this buying opportunity come and go. Don’t despair too much about this. Let’s say this crisis lasts two months and, under normal conditions, let’s say that you’re investing $10,000 per month – so you miss out on a $20,000 investment. In this case (which is the case for almost all of you), the investment opportunity lost will cause more emotional pain than actual pain. Investing $20,000 – even at a steep discount – will not elevate you to the next socioeconomic class or make the difference in your retirement. Most importantly (and most relevantly) this “opportunity” is not more important than surviving the next few months.
Should I get a line of credit?
Yes. Green light to contact your bank to apply for a line of credit. However, I don’t necessarily recommend using the line of credit if you still have cash, as the LOC can instantly be redeemed for cash.
Please let us know if you have additional questions or if we can help in any way.