Tax increases in the bill

Here’s some good news: if you’re a small business owner or real estate investor, the Inflation Reduction Act probably doesn’t raise your taxes.

The major revenue raisers in this bill are:

• A new book minimum tax for large ($1 billion+ average book income) C corporations
• A new excise tax on stock buybacks (only applies to publicly-traded corporations)
• Extension of excess business loss limitation rules from 2026 to 2028
• Increased money for IRS enforcement

The extension of the excess business loss limitation rules will hit some real estate investors. But for most folks in this category, we think the increased money for the IRS will be the most visible and meaningful change to our tax system due to this law. As we’ve frequently noted on this blog, keeping good records and staying on top of your bookkeeping are the two most important ways to protect yourself in an audit.

Tax increases not in the bill

Back in the autumn of 2021, Democrats had proposed significant changes to the federal income tax code. In response to these proposals we wrote a blog post last September on the slow death of the S corporation, had the ideas become law.

Well, it turns out reports of the S corporation’s death were greatly exaggerated; the Inflation Reduction Act contains no changes to the net investment income tax, or NIIT. It also contains no changes to the basis step-up rules for inherited assets, no change to the unified gift/estate tax credit, and no changes to IRA contribution or distribution rules. In fact, we could write a whole laundry list of proposed changes that never found their way into the Inflation Reduction Act—and we have:

• No change to top marginal rate for individuals
• No changes to capital gains tax rates
• No “billionaire tax”
• No changes to SALT
• No changes to 199A
• No change to carried interest loophole
• No change to 21% C corporation rate
• No new limits on deductibility of interest expense for C corporations
• No changes to limit 1202 exclusions
• No changes to expand wash sale rules
• No changes to foreign tax credit
• No changes to GILTI, FDII, or BEAT

So, what else is in this bill? Well, a lot of climate change-related stuff.

Green tax incentives for real estate investors

Real estate investors may be interested in the bill’s tax incentives for green retrofits—especially if your building is in Washington State and subject to the Clean Buildings law.

For multifamily and commercial buildings: a 179D revamp

Section 13303 of the Inflation Reduction Act dusts the cobwebs off Section 179D of the tax code. The 179D deduction is, in essence, a depreciation acceleration trick similar to the Section 179 deduction small business owners are familiar with. The basic idea is if a real estate investor either (1) purchases a new energy efficient building or (2) makes a deep energy retrofit to an existing building, the investor can deduct a large chunk of the cost of that asset in the first year instead of waiting several years to deduct the cost as “depreciation expense.”

The amount a taxpayer can deduct up front is the lesser of either (1) the cost of the retrofit or (2) the result of a complex formula built around an efficiency engineering standard, ASHRAE Standard 90.1. Predictably, then, one of the rules for claiming a 179D deduction is that an independent licensed engineer (or in some cases, an architect) must certify the energy savings targets before the taxpayer can claim the deduction.

We’re not going to go into the nuts and bolts of the formula here, because really the way to claim this deduction is to hire a consulting firm staffed with tax professionals and engineers to design the retrofit to maximize the deduction for you. They’ll calculate your deduction and prepare a report for your regular tax accountant as part of that process. But here are a few key things to understand about Section 179D if you’re interested in this tax savings opportunity.

First, know that this deduction is for larger buildings: think commercial buildings, 4+ story apartment buildings, schools, hospitals, etc.

Second, know that a 179D deduction isn’t something to start thinking about when it’s time to prepare your tax return for the year. You need to decide whether you’ll claim this deduction before you begin the project. That’s because you’ll want to choose a design firm that really knows Section 179D and the ASHRAE standard it rests on, to make sure their design meets the tax law’s requirements. And if you want to claim the full deduction, not just part of it, you’ll need to be sure the building contractor you select for the construction work understands and complies with the Inflation Reduction Act’s new prevailing wage and apprenticeship rules.

Third, for the sake of my own conscience, I feel I ought to point out that the consulting fees for calculating 179D deductions can be very expensive. And some big players have gotten into hot water after being fairly aggressive with this stuff.

Finally, this may be an odd thing for a tax accountant to admit, but there are options for funding deep energy retrofits that go beyond tax deductions and credits. For example, some sophisticated real estate investors in Seattle are experimenting with a novel transaction structure called the “metered energy efficiency transaction structure,” or “MEETS” for short. And King County recently launched a PACE loan program. Of course, we can’t endorse any particular financing idea for you if we don’t know your situation. But we want to acknowledge that there are many options to consider.

For buildings with a sunny roof: the commercial solar panel credit

Section 13102 of the Inflation Reduction Act extends the commercial tax credit for solar panels (in Section 48 of the IRC) to 2034, with a phase-out beginning in 2032. Starting January 1, 2022, your maximum tax savings will be 30% of whatever the panels cost your business or real estate activity.

Example: You install a $20,000 solar panel system on a duplex you own and lease to tenants. If you qualify for the credit and meet the wage and apprenticeship rules, the IRS will pay for 30% of the cost of the system—so, $6,000.

That probably already sounds pretty good. But here’s where the numbers get silly. In addition to getting a (usually 30%) tax credit, Section 48 “energy property” also gets a 5-year asset life under MACRS. What’s more, the section 48 credit reduces the basis for depreciation by only half the credit amount. And while you can’t use the Section 179 deduction on any property you’ve claimed the Section 48 energy credit on, for the next few years you can likely use bonus depreciation to achieve a similar result.

So, just to put this all together: if a landlord installs a solar energy system on a building it owns and rents to tenants, or a small business installs a solar energy system on a building it owns and uses for business, not only will the IRS pay for up to 30% of the cost of the solar panels, but the panels get depreciated over just 5 years (even though in reality the panels will likely last for 25-30 years). What’s more, even though you might think the depreciable basis would be the 70% of the cost of the panel the landlord or business owner paid themselves, really the basis for depreciation is 85% of the total cost of the panels (because only ½ of the credit is subtracted from the depreciable basis). And remember, just like any other 5-year property, the depreciable basis can be (at least partially) expensed using the bonus depreciation rules, depending on what year you install and start using the property.

Now, of course Congress has attached some strings to all of this free money. The panel system must be new, not used, and it needs to be located in the United States. You’ll also need to comply with the Inflation Reduction Act’s new prevailing wage and apprenticeship rules, or the credit is only 6%. And you must hold the property at least 5 years or the IRS will recapture the credit.

One final comment: the Inflation Reduction Act adds 10% to your solar panel credit if you install the panels in a low-income community, and 20% if you install the panels on a qualified low-income residential building project. There are also bonus credits for using domestic content and for installing panels in an “energy community” (think West Virginia coal country).

For parking lots in low income or rural areas: the EV charger credit

Section 13404 of the Inflation Reduction Act extends and modifies the Alternative Fuel Refueling Property Credit. “Alternative refueling property” includes electric vehicle charging stations, so this credit is relevant for any building owner who would like to install EV chargers in their parking garage or parking lot.

The new EV charger credit rules apply to property placed in service after December 31, 2022, and the credit expires December 31, 2032. One notable difference between the Senate Finance Committee proposal and what passed the Senate last Sunday: this credit is now only available to EV chargers installed in low income communities and rural areas. It’s also worth noting that the Inflation Reduction Act modifies section 30C to make bidirectional charging equipment and charging equipment for 2- and 3-wheelers eligible for the credit.

Example: You own a small office building in a low-income community and install 10 level 2 EV chargers in the building’s parking lot for $3,500 each (including parts and labor). If you qualify for the credit and meet the wage and apprenticeship rules, the IRS will pay for 30% of the cost of the chargers—so, $10,500.

Predictably, there are some strings attached. The charger must be new, not used, and it needs to be located in the United States. To get the full 30% credit, you’ll need to comply with the Inflation Reduction Act’s new prevailing wage and apprenticeship rules; otherwise, the credit is only 6%. And the credit is limited to $100,000 per item of property (that limit used to be $30,000 and it used to apply per location, not per item).

The Inflation Reduction Act keeps language in the old statute which says recapture rules “similar to” the rules of 179A apply to the credit. Section 179A has since been repealed, and the IRS never actually put out formal guidance on how the recapture rules work. All we have is an 11-page notice, IRS Notice 2007-43.

For housing developers: the Energy Efficient Home Credit

If you’re a housing developer who specializes in building energy efficient homes, you’ve probably been watching this provision in Build Ba—er, the Inflation Reduction Act—for months. But for the sake of thoroughness, we’ll note that section 13304 extended the Energy Efficient Home Credit (in section 45L of the Internal Revenue Code) to 2032, increased the credit’s size, and modified the eligibility requirements.

The old version of the credit provided $2,000 to eligible contractors for each newly constructed or “substantially reconstructed” home if the home consumed 50% less energy than a comparable dwelling unit and had a building envelope that accounted for at least 1/5 of the energy reductions. The Inflation Reduction Act increases this amount to $2,500 for homes meeting Energy Star requirements and $5,000 for zero energy ready homes, assuming the project meets new prevailing wage and apprenticeship requirements.

The new credit rules apply to dwelling units acquired after December 31, 2022.

How the credits interact with utility rebates

One final thing I’ll mention is how the tax code treats utility rebates, and how those rebates interact with the tax credits I’ve described in this blog post.

In general, utility rebates are taxable income. But section 136 of the Internal Revenue Code says a taxpayer’s gross income doesn’t include “any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy conservation measure.” This section also says taxpayers can’t claim a tax credit or deduction for any amount paid for with this sort of utility rebate.

So, if you claim a rebate from your local utility for a purchase that meets the statute’s definition of an “energy conservation measure,” you won’t need to pay income tax on the amount, which is good. But you’ll also need to subtract that amount from the purchase price first before calculating any tax deductions or credits. For example, if you install solar panels on an apartment building you own and claim a utility rebate for the panels, and the rebate counts as an “energy conservation measure” under Section 136, you’ll need to subtract the rebate from the cost of the panels before calculating the credit.

The post Inflation Reduction Act: What Every Real Estate Investor Should Know appeared first on Evergreen Small Business.

After mulling over the authors’ ideas for the last several weeks, a conclusion: What these guys report? It matters to small business owners and entrepreneurs. A lot.

Capitalists in the Twenty-First Century Research

The economists’ research makes a fascinating observation: The largest share of the income earned by the top one percent and the top one-tenth of the top one percent? Non-wage business income earned by partners and S corporation shareholders. And more specifically, typically business owners working in a high-skill, “human capital” business.

Definitely not trust fund babies anxiously awaiting their next distribution. Or passive investors fueling high living with dividends and capital gains. Something much, much different than these stereotypes.

Let me quote from the research to give you their insight about just who makes up the top one percent and top one-tenth of one percent:

The data reveal a striking world of business owners who prevail at the top of the income distribution. Most top earners are pass-through business owners. In 2014, over 69% of the top 1% and over 84% of the top 0.1% earn some pass-through business income.

The research also describes the sorts of firms that top one percenters typically own:

Typical firms owned by the top 1-0.1% are single-establishment firms in professional services (e.g., consultants, lawyers, specialty tradespeople) or health services (e.g., physicians, dentists).

And also the sorts of firms that the top one tenth of the top one percent own:

A typical firm owned by the top 0.1% is a regional business with $20M in sales and 100 employees, such as an auto dealer, beverage distributor, or a large law firm.

This observation challenges the hypothesis presented by French economist and author Thomas Piketty in his bestseller “Capital in the Twenty-First Century.” (You see where Smith, Yagan, Zidar and Zwick got their paper’s name.) And it also challenges the work of Emmanuel Saez and Gabriel Zucman who have employed Piketty’s ideas to develop wealth tax proposals for the United States.

But does the paper from Smith, Yagan, Zidar and Zwick also point out new rules for twenty-first century entrepreneurs? And new rules for today’s investors? I think so. In fact, I see at least three big insights that drop out of their research.

Twenty-First Century Entrepreneurs are Human Capitalists

The first big obvious insight from the research? Simply this: If you want to work as an entrepreneur or own your own business, probably you want to start a human capital business.

You don’t want to be a financial capitalist.

You want to be a human capitalist. A skilled expert who provides an in-demand service. And then you want to work your way into an ownership role in a firm that delivers that service.

So, probably not a real estate thing. Probably not something that uses a factory. And probably not a deal where you raise financial capital from angel investors or venture capitalists or banks.

Rather what you want to think about are business ventures you can only do because you went to medical or law school. Or because you went to college and got a technical degree. Or because you have spent years learning some high-skills trade or craft. And as a result, you personally have acquired a lot of human capital in the form of knowledge, maybe credentials and then also experience.

For example, the top three S corporation categories of top one percent earners? A doctor’s office, a technical services firm, and a dentist’s office.

And the top three partnership categories of top one percent earners? A law firm, a doctor’s office, and an accounting firm.

The list of top earning categories appears at the very end of the 60-page research paper (see link at end of this blog post). But just so you know. All sorts of high skill categories appear on the list, including specialty contractors, restaurants, and you name it. Not just white-collar-y professions. Human capital comes in many colors and sizes.

Wealth Building Works Differently for Human Capitalists

Another actionable insight from the research: People don’t automatically get rich from running a super-successful human-capital business. Or at least not rich as rich gets depicted in movies or books. Or depicted in the research from Piketty, Saez and Zucman.

The Smith, Yagan, Zidar and Zwick research results highlight this reality. They point out that when top one-percent-ers retire or die, the income earned by their human capital business drops by eighty percent or more.

The researchers logically conclude, then, that the business income earned by these firms mostly reflects the labor provided by the firms’ owners.

And then here is another take-away for entrepreneurs: Most owners of successful small businesses need to build wealth outside their businesses. By saving a big chunk of the business owner’s income.

In other words, the way to build net worth is not by selling the firm and exiting with a giant windfall. That is not a likely outcome even for super-successful small business owners. Why? Because these firms rely on human capital that evaporates when the owners die or retire.

Rather, the reasonable best-case outcome is probably two or three decades of great income from the business you own. Which small business owners and entrepreneurs should use to fund two or three decades of aggressive saving.

We pointed out in a blog post a couple of years ago, Lifetime Earnings of the Top One Percent, that someone would need to earn a top one percent income and make the maximum 401(k) contribution for three decades to accumulate a couple of million dollars. Which is great, don’t get me wrong.

But there’s a big difference between earning a $300,000 year (which if earned over thirty years might put you in the top one percent) and then drawing $80,000 annually from your $2 million retirement (which would reflect an average rate of return while accumulating and then use of the well-known 4 percent safe withdrawal rate in retirement.)

Is Everyone a Human Capitalist?

Finally, a quick last comment. And this isn’t something Smith, Yagan, Zidar and Zwick say. But I think their research supports the conclusion.

Individuals need to think more about investing in their human capital. Even when they aren’t interested in entrepreneurship or small business ownership.

All the time and energy people spend trying to juice portfolio returns or tweak their asset allocation? (Investing books, time spent in online forums and so on.)

And all the time people spend thinking about and then building and managing a portfolio of rental properties? (Seminars and workshops, books and again online forums.)

I mean, that’s all good. But probably the big money opportunity? Finding a way to grow your or my human capital: a new skill, more knowledge or experience, a credential the economy financially rewards, and other stuff like that.

Related Resources You Might Find Useful

Here’s a link to the paper from Matthew Smith, Danny Yagan, Owen M. Zidar and Eric Zwick: Capitalists in the Twenty-First Century. This obvious comment you don’t need me to make: If you’re an attorney, accountant or investment advisor, you want to read this research paper. Probably more than once. It describes who your (and my) clients are.

Smith, Zidar and Zwick published another research paper that builds on the “Capitalists” paper and provides some updated information: Top Wealth in America: New Estimates under Heterogeneous Returns

Finally, it’s not specifically about twenty-first century entrepreneurs or investing. But we did a blog post on the That Nearly Secret IRS Wealth Study which further discusses the research of Zwick.

The post Human Capitalists in the Twenty-First Century appeared first on Evergreen Small Business.

So even if our costs rose? We sort of ignored that. We were more concerned with helping people get through the last couple of years. Helping readers of our blog and then our clients get PPP loans, for example. And helping folks maximize employee retention credits.

And when the pandemic or regulatory changes pushed up costs? Okay. Keep this under your hat. It’s a little embarassing. Because we’re accountants. But we also pretty much ignored that. We were doing tax returns.

And so now after a couple of years of mostly flat prices, we need to get serious about repricing for inflation. And why I’m talking about this openly in a blog post?

Well, I am very sorry to suggest yet another task for your crowded to-do list. But I suspect you too may need to think about how to raise your prices for the effects of inflation.

But let’s go over the arithmetic and the accounting.

Why You Need to Raise Your Prices

The rationale for raising your prices? Well, if you haven’t yet experienced it in a big way, inflation is coming.

But probably? You’ve already been experiencing inflation. Stuff costs more now. People, Technology. Insurance. Rent.

And then the other issue that you may be confronting? The way you may have compensated for inflation in past? You know, just making it up on volume? So by selling more?

Supply and capacity constraints maybe won’t work in this environment. At least for a while. (See this article from Forbes.)

Accordingly, to stay economically viable? You may have to rise prices. Regularly. Diligently.

A Really Simple Example: What Not to Do

Let me construct a really simple example of what you don’t want to happen.

Let’s assume your revenues run $1,000,000, your cost of goods sold runs $500,000, and your overhead (rent, salaries, advertising and so on) run $300,000.

That means you make $200,000 a year if things work as you want. Now probably you use a chunk that $200,000 of profit to grow your business. We both know that’s the way small business works.

But let’s ignore that complexity. And with that simplification, your baseline year looks like this:

That’s pretty good, right? I agree.. But danger lurks.

What Inflation Does to your Profitability

The problem you face now is how to respond to inflation. Probably your costs of goods sold is inflating. Maybe even sharply.

And then your overhead costs—salaries, rent, advertising and so on–are surely coasting up, too.

If cost of goods sold increases by five percent and overhead costs increase by four percent for each of the next couple of years—and you don’t adjust your prices—things might be pretty bleak, as shown below.

Just to point out the obvious: For the baseline year, cash profits equal $200,000.

But after two years of steady inflation, cash profits shrink to $125,000 if you can’t raise your prices.

That’s brutal.

And this sidebar because some business owners and most non-business owners miss this point: Those cash profits do not equate to owner wages.

Some of the  money represents owner wages. But some of it represents payroll taxes. Some of it represents the fringe benefits like the employees get. And much of it goes to grow the business (by investing in inventory, fixtures and equipment.)

How Price Bumps Fix Profitability Problems

You can see what you need to do: You need to raise your prices so you don’t continually experience shrinking profits

Suppose you increase your prices by four percent, across the board.

In that situation, even if cost of goods sold increase by five percent and overhead costs increase by four percent for each of the next couple of years, things look way better.

Which probably shows you what you need to do. And what we need to do. And for the record? I agree regularly raising your prices to deal with inflation isn’t very pleasant.

But the pandemic changed a lot of stuff. And getting used to dealing with the impact of inflation on your profit margins and bottomline profits? Yeah, probably just another new task you need to deal with. Sorry.

Related Blog Posts

How to Grow Your Small Business

Hidden Magic of Arithmetic Growth

Pricing Small Business Services Profitably

The Small Business Long Game: Compound Growth

Has Your Business Stopping Growing?

The post Psst. Time to Raise Your Prices. appeared first on Evergreen Small Business.

You want to learn about this bit of federal government largesse. If you’re an entrepreneur. Or if you’re a small business owner. Because it’s nearly unbelievable.

But in a nutshell? The federal government will give you up to $100,000 for paying your employees if you’ve started a new trade or business.

The Actual Statute

Let’s look at the actual Section 3134(c)(5) language. Because that rather clearly gives you the lay of the land.

Here’s the law Congress wrote and passed and which the President signed:

(5) Recovery startup business

The term “recovery startup business” means any employer-

(A) which began carrying on any trade or business after February 15, 2020,

(B) for which the average annual gross receipts of such employer (as determined under rules similar to the rules under section 448(c)(3)) for the 3-taxable-year period ending with the taxable year which precedes the calendar quarter for which the credit is determined under subsection (a) does not exceed $1,000,000, and

(C) which, with respect to such calendar quarter, is not described in subclause (I) or (II) of paragraph (2)(A)(ii).

That’s it.

So, to summarize? A trade or business you start after February 15, 2020.

A situation where the employer’s average annual gross receipts do not exceed $1,000,000.

Finally, a situation where the employer would not qualify for employee retention credits under the usual rules. Those usual rules? Revenues less than 80 percent as compared to the same quarter of 2019. Or government orders closing the business either fully or partially.

Note: We most recently discussed the “usual” qualification rules for employee retention credits here: Solving the Employee Retention Credit Partial Suspension Puzzle. And for the record, you would want to use the usual rules if you could, because they’re even more generous if you qualify.

Example of Trade or Business Started After February 15, 2020

Let me give you a couple of examples of trades or businesses started after February 15, 2020.

Example 1: You open a restaurant on February 16, 2020. In this case you qualify. Note that had you opened one day earlier? You would not qualify.

Example 2: You operate an accounting firm and prepare people’s taxes. So that’s one trade or business. But on August 15, 2021, you open an equestrian center. Which represents another trade or business. You do qualify for the credit potentially because you began carrying on a trade or business (the new equestrian center) after February 15, 2020.

Example of Gross Receipts Limitation

The statute limits the recovery startup business employee retention credit. Only businesses with average annual gross receipts of $1,000,000 or less for the three previous years qualify.

If you have less than three years of operation, you look only at the years you operated.  (This is why the law quoted above references Section 448(c)(3).)

Some examples show how this works.

Example 3: The fictional restauranteur from Example 1 generated zero revenue in 2018 and 2019 but $300,000 of revenue in 2020. His three-year average, therefore, equals $300,000 . Because ($300,000)/1 year equals $300,000. And, obviously, $300,000 “does not exceed $1,000,000.” Accordingly, he qualifies.

Example 4: The fictional tax accountant faces a more complicated situation. Following a rule specified in Section 3134(d), she needs to aggregate the gross receipts from the businesses she operates. But say the tax accounting firm generated $400,000 in 2018, $800,000 in 2019, and $1,200,000 in 2020. Further suppose the equestrian center generated zero revenue in 2018, 2019 and 2020. Because it only starts in 2021. In this case, the average gross receipts for the three years equals $800,000 because ($400,000+$800,000+$1,200,000+$0+$0+$0)/3 years equals $800,000. And because $800,000 “does not exceed $1,000,000,” she qualifies.

The Recovery Business Startup Employee Retention Credit Limit

One final thing to mention.

The usual employee retention credit in 2021 equals seventy percent of up to the first $10,000 an employer pays employees.

Example 5: An employer with ten employees who each earn $10,000 a quarter might receive $70,000 of employee retention credits, assuming she, he or they qualify. Note that if the employer paid each of these ten employees $15,000 for the quarter, the credit doesn’t increase in size. The formula only looks at the first $10,000 in wages an employee earns, giving the employer a credit equal to seventy percent of this amount.

The recovery business startup employee retention credit formula limits the benefit, however.

Quoting the statute, the credit “for any quarter, shall not exceed $50,000.”

Example 6: If the employer described in Example 5 doesn’t qualify for the usual employee retention credits but does qualify for a recovery startup business credit, the credit equals $50,000.

Note, too, that the credit only works for the third and fourth quarter of 2021—so two quarters.

But still, think about that. $100,000 is lot of money. You want to keep your eyes open for new trades or businesses you can start…

Other Resources

Here’s the full statute that creates the recovery startup business employee retention credit: 26 USC 3134: Employee retention credit for employers subject to closure due to COVID-19

IRS Notice 21-49 provides the only additional guidance on the recovery startup business credit (see pages 6 through 11) and it’s available here.

If you realize some of your staff need more training about how the employee retention credits work, no problem. We’ve got economical $14.95 paperback book that represents a great way for staff, managers and partners to learn how employee retention credits work: Maximizing Employee Retention Credits.

Finally, we’ve also got a number of related articles and blog posts about the employee retention credit and many may be useful for folks still getting up to speed.

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Cases, hospitalizations and fatalities have collapsed in the U.S. since the beginning of the year.

In the U.S., we no longer look for a light at the end of the tunnel. We are moving out of the tunnel.

But the pandemic ending—or more accurately, the end of local and regional epidemics across much of the U.S.—isn’t just good medical news.

The pandemic ending means small businesses need to quickly adapt to a new post-pandemic economy.

This blog post shares thoughts about this post-pandemic economy and small businesses.

Tip #1: Understand Competitors May Be Ahead

A first comment—which isn’t something to freak out about—but rather something to know: Competitors may be ahead of you on this. But let me explain.

The collapse in cases, hospitalizations and fatalities? That’s been apparent to some owners and managers for weeks or even months.

The line chart below—which comes from the CDC data tracker—shows Covid-19 cases in the U.S. since the beginning of 2020. And many scientists and mathematicians were saying even before the peak in cases at the year end that infections would or were collapsing. (See our earlier blog posts here and here for the names of those folks.)

Now obviously people disagreed. One could often read news coverage earlier this year that suggested the pandemic was worsening. In February 2021, for example, one particularly popular pessimistic prognosticator said we still faced a “category 5 hurricane.”

But the point isn’t that the collapse was 100% certain. Even if the collapse looked mathematically likely.

Rather, the point is smart executives and savvy entrepreneurs included that “pandemic ends soon” scenario in their planning.

At this point, those foresighted managers and leaders have already responded. And you and I don’t want to get left behind.

Tip #2: Stay on Top of Local Guidance

A first concrete step you can take? And starting right now? Get disciplined about staying on top of state and local guidance.

Public health policies will change as things get better. Restrictions will end in your markets if they haven’t already. You want to be ready to respond quickly.

Already in online social media networks, you can see people talking about businesses quickly adapting to and recognizing the newest guidelines.

Example: You can find people saying they will shop someplace like Costco or Wal-Mart (which nearly immediately updated in-store policies for new CDC guidance related to vaccinated customers). And those customers will in effect indirectly penalize Costco and Wal-Mart competitors who delay.

By the way? I think you might choose to lose vaccinated customers to quick moving competitors. Maybe you serve customers who often can’t get vaccinated, for example. But you’d want to consciously make this decision. Ideally for strategic reasons.

Tip #3: Watch Your Supply Chains

A quick caution: you want to stay alert to the possibility your supply chains break or get stuck as the economy restarts.

CPA firms, for example, buy lots of technology products. So tons of hardware and software.

And one of the things we’ve noticed? You can’t quickly buy computers right now. (The order wait time runs months.)

And then the bigger point: Other stuff you and we need? We may experience the same supply chain problems.

Even things like retailers changing hours or consolidating outlets can really change the way we all need to operate going forward.

Tip #4: An Awkward Comment About Quality

So something internal to be aware of… and gosh this is awkward…

Quality problems  with both services and products seems to be growing. That’s based on largely anecdotal evidence. (Which, yes, you should suspect…)

But working from home, burdened by restrictions, struggling through supply chain glitches? Yeah, this sort of stuff seems to push down product and service quality.

Probably customers and clients will just need to accept this. At least for a little while.

But you and I need to work diligently to prepare customers or clients for quality reductions. And then work diligently to return to earlier quality standards.

Example: An area where professional service firms have unfortunately reduced quality? Turn-around times. Many of us have struggled mightily to deliver in our usual timeframes. We need to get better, soon as we can. And we need to keep customers and clients informed in meantime.

Tip #5: Plan for Possible Labor Shortages

You would think workers are widely available. Nearly a third of small businesses appear to have closed according to Opportunity Insights’ Track the Recovery website.

The ten million small businesses who possibly closed presumably employed workers who should now need employment.

But one reads news reports that suggest regional labor shortages are stalling small businesses reopening or are pausing growth.

Example: Prior to the pandemic, we were often able to advertise a job opening online and get dozens of applicants within a few hours. The last time we did this, however? Four applications.

Tip #6: Keep Eye Out for Inflation

Former Treasury Secretary and Harvard Economist Lawrence Summers warns significant inflation is underway.

Whether Secretary Summers is right or wrong? Who knows. (I would bet he is, in case you’re interested.) But maybe the actionable point is, we want to consider the possibility that inflation unlike anything we’ve recently seen may become a “thing” over the next few years.

You and I therefore don’t want to be in a situation where we lock in flat or even just stable prices for customers but then need to buy production inputs that continually increase due to inflation.

Tip #7: Consider Sustainable Growth

A final caution: In many business categories (for example, food, accommodation, some brick and mortar retailing) firms got really beat up by the pandemic.

Overall, small business revenues declined by about 30 percent according to Opportunity Insights.

If you’re in the group that got beat up, you need to assess if you have enough working capital on your balance sheet to resume normal operations.

You may need to secure new funding. Or start slow and re-build your working capital by reinvesting profits.

Tip: If you were right-sized in terms of working capital before the pandemic, in the post-pandemic economy, you’ll probably need to have that same working capital to operate comfortably.

Two Final Comments about Post-pandemic Economy

The pandemic is over many places in the U.S. That’s really good news!

But that means for many small businesses, a big new challenge appears. Restarting operations and returning to a normal.

The post The Post-Pandemic Economy and Your Small Business appeared first on Evergreen Small Business.

But something unexpected popped onto my radar screen just recently. A local small business owner who amassed a tidy fortune by patiently building his business.

A guy who basically played the long game. But won big because he did. Even though he operates in a pretty boring, mature category.

But let me explain.

Compound Interest Magic

You know about compound interest probably.

If you invest a small sum regularly, your interest earnings compound over time. Slowly at first, of course. But steadily.

Eventually, after decades, the numbers get big.

For example, if you invested $6,000 a year over your working years in the U.S. stock market? You may start retirement with about a million dollars. (I adjust for inflation here, by the way.)

Compound Growth Shows Up Other Places

But this compounding of interest, or compound investment growth, shows up other places too.

Pay an extra $25 a month on a 30-year mortgage, for example? In the end, you’ll save thousands of dollars of interest. (How much you save depends on interest rates. Your savings compound at the mortgage interest rate.)

Small business owners enjoy another possibility: Compound growth of small business revenues, profits and valuations.

And the big surprise here: This math often works more powerfully than many small business owners appreciate.

Which brings me to my real life example…

Small Business Compound Interest

A local CPA firm owner listed his firm for sale last month. His asking price? Nearly $8 million.

That’s for a firm that, according to the listing at bizbuysell.com, earns slightly less than $2 million of profits on slightly more than $5 million dollars of revenue. (I round the numbers here for readability.)

Now before you think you’re in the wrong business or profession, let me bring you back to earth. Average CPA firm revenues run maybe $200,000. (That’s the number I calculate based on analysis described here: Small CPA Firm Profitability.)

Profits? Oh gosh, it depends. But many small firm owners probably earn about what a similar-age public school teacher earns in salary, fringe benefits and retirement savings. (See this schedule, for example, and remember to add maybe $15,000 for health insurance and retirement benefits.)

The CPA firm described here, however? Massively larger. Massively more profitable.

What in the world is going on? How do we explain this outlier?

I think a simple answer suffices: Compound growth in the firm’s revenues.

In this case—and here I’m guessing at one of the numbers–roughly 10 percent annual growth in revenues.

If in 1990, for example, the firm generated $300,000 of revenue, it grew that value to $330,000 by 1991. It then grew the revenues again in 1992 by 10 percent, or to $363,000. And so on.

Continue this growth rate over three decades, however, and bingo. The business revenue grows to $5 million.

The Big Takeaway for Small Business Owners

Most CPAs and most CPA firms serving small businesses don’t enjoy growth anything like the firm I point to here.

Neither do most small businesses.

But the small business compound growth this story describes? That’s really relevant for you and your firm. And for me and my firm.

Slow steady growth over decades compounds. Further, that growth in revenues means growth in profits and the business value.

Eventually, the numbers grow bigger than one would ever guess.

A statement to provide context: If you can orchestrate steady compound growth at your small business? Your financial results should greatly exceed what you might earn from saving money in a retirement account stuffed full of index funds.

Three Smaller Points about Small Business Compound Growth

Let me share three other quick points related to the earlier example.

First, the business owner identified an engine he could use to power steady growth—and then he had a “growth” mindset. By the time I ran into him, he was regularly buying smaller CPA firms to fuel firm growth. (That’s how I met him. He offered to buy ours.) The point here? A small firm doesn’t grow big by accident.

Second, the business owner organized his operation to be scalable. His firm used procedures and technology and then employed people who supported steady growth. To point to one example, his tax software worked for a firm with two dozen employees. To point to another example, he employed a compensation formula that attracted talented tax accountants.

Third, a general comment about sustained growth. To grow revenue year in and year out, this business needed to carefully grow its balance sheet year in and year out. That subtlety gets missed by some managers. Often with fatal results. But if a firm that generates $300,000 of revenue requires, say, $30,000 of assets? Probably, to grow the revenue by 10 percent (to $330,000), the business owner also needs to grow the balance sheet by 10 percent (to $33,000). Further, that arithmetic reality grinds on as long as the firm continues to grow.

Two Quick Comments to Close

Two quick comments before I wrap this up.

First, the real-life example that triggered this blog post uses big numbers. But the compound growth math works just as powerfully for a smaller small business. To give you another example, if your business revenue currently equals $50,000 and you grow by 10 percent on average, you get to $200,000 in revenue after 15 years. Which would be fantastic. Obviously. Further, your profits probably at least quadruple if your revenues quadruple.

Second, I’m writing this blog post for a business owner. And so the earlier paragraphs talk in terms in what works for the entrepreneur. But keep in mind a growing business rewards other people too. Probably, for example, a growing business creates jobs. Probably, a growing profitable business boosts the pay rates for the people on your team. Almost surely, a growing business creates a more intellectually interesting workspace.

Other Resources

Some other online resources can help you think more deeply about the issues mentioned in this blog post.

For example, we’ve got several articles that describe issues and concerns related to growing a small business: How to Grow a Small Business (which supplies tips from experienced business owners),  the Hidden Magic of Arithmetic Growth, and How Taxes Kill Successful Businesses (which is really about sustainable growth math).

Also, let me point out that small businesses as they get bigger often need to “grow” the ways they market themselves something discussed here: Has Your Business Stopped Growing?

Wikipedia has a good article about sustainable growth rates here. That would be a useful read for many managers.

Finally, here’s the actual listing for the CPA firm. It won’t be posted permanently, of course.

The post The Small Business Long Game: Compound Growth appeared first on Evergreen Small Business.

Some bad news, I’m afraid. Covid-19 closures appear to be killing millions of small businesses.

That’s maybe not a huge surprise. Also, we’ve had bigger fish to fry. At the time I’m writing this, nearly 200,000 Americans have died from Covid-19, according to the CDC.

But in this blog post I want to to shine a light on the small business closures triggered by the Covid-19 pandemic.

More people—not just small business owners—need to understand the scope of the problem.

Further, small business owners need to understand mechanically how Covid-19 closures kill small businesses. That understanding may allow some to sidestep a permanent closure.

But first a quick review of the data regarding the pandemic’s impact on small businesses.

Small Business Covid-19 Closure Statistics

Good data on Covid-19 closures is still scarce. Yelp provided some painful statistics from their database of roughly 5 million small businesses. As of June 15, they calculated that 139,339 small businesses had closed. That works out to roughly a 3 percent closure rate.

Economist and professor Richard W. Fairlie did some early assessment as part of a working paper published by the National Bureau of Economic Research (available here:  The Impact of Covid-19 on Small Business Owners: The First Three Months After Social-Distancing Restrictions.) Professor Fairlie estimated that roughly 8 percent of small businesses appeared closed in June.

But I think the richest data at this point comes from the working paper, “The Economic Impacts of COVID-19: Evidence from a New Public Database Built from Private Sector Data,” written by Raj Chetty, John N. Friedman, Nathaniel Hendren, Michael Stepner, and the Opportunity Insights Team.

In that paper, the researchers describe data that at the time I’m writing this suggest about 19 percent of small businesses have closed in the U.S.

Here’s a line graph that depicts this from the Opportunity Insights Track the Recovery website the researchers helped build. You want to visit this resource and look at the data for your geographic area and industry category.

The shocking takeaway? If nearly 20 percent of small businesses have closed at this point, we’re talking maybe 6 million small firms. (The SBA reports 30 million small businesses exist.)

Another way to frame the situation: Roughly 60 million Americans work in small firms, according to the SBA. If nearly 20 percent of these folks are out of work due to Covid-19 closures, that’s 12 million unemployed workers who need these small firms to restart in order to have a job again.

That’s pretty bad.

Covid-19 Closures Matter More than Many Understand

Okay, so now a related point regularly missed by some policy makers and policy influencers.

A small business closure differs from someone losing a job. A small business owner can’t just reopen when a lock down ends or when consumer demand returns. And yet many people you hope know this apparently don’t.

Consider, for example, the policy advice provided by Michael Osterholm, the director of the Center for Infectious Disease Research and Policy at the University of Minnesota. Dr. Osterholm seems to be a proponent of lock downs, which contribute to Covid-19 closures. He explicitly recommended them in recent New York Times editorial.

But he appears to miss the long-time economic consequence of shuttering millions of small businesses.

Here, for example, is his comment in a recent podcast about Covid-19 with boldfacing added:

Are we going to take the short term pain, and this time do it right, and shut down, get the numbers down, keep the distancing in place, or are we just going to let it continue to transmit as is because it’s inconvenient…

The piece I worry Dr. Osterholm and others miss? Running a profitable small business that provides stable income to the owner and other employees requires a long runway.

Some of the reasons for the long runway are obvious. Consider a worker looking for a job in a normal economy. Someone might look for a new position. Interview. Then start work. Lag times vary. But for some jobs, you’re talking days. Other jobs, weeks. But pretty quick.

Reopening or restarting a small business works differently. The time frames stretch out to start or restart. For example, getting people hired or rehired. Updating websites. Ramping up advertising and marketing.

And then let me point out the other nearly hidden issue that all the now closed small businesses face.

But we’ll need to work from an example.

An Example Small Business

Consider a fictional small service business that typically generates the following annual profit and loss statement:

To keep things simple, assume that $300,000 of annual revenue runs pretty evenly through the year, so $25,000 a month.

Let’s also assume that the expenses run pretty evenly through the year.

Note this also means the owner, or owners, therefore earns her, or his, or their profit in roughly even chunks. So about $8,000 a month. Or, if two people own the firm, about $4,000 a month.

The Forgotten Financial Statement

Small businesses often don’t pay much attention to their balance sheet. (I say this based on my experience as a CPA serving small businesses.)

But the imaginary business described earlier? That business should regularly prepare a schedule of the assets it uses in its operations, any debts it owes, and the left over amount—which represents its owner capital.

To keep this example really easy, assume the firm holds $25,000 of cash (to smooth out the rough spots) and a truck worth $25,000. Maybe we’re talking a little moving company.

With zero debts, the firm’s balance sheet looks like what follows:

See if that balance sheet makes sense. It should.

The main two things to spot? First, the business uses $50,000 of assets. Second, with no debts, that money comes from owner’s capital investment.

And then the other important but subtle thing to note: A firm needs the assets and the capital its balance sheet shows.

Now let’s get back to the hidden destruction that the Covid-19 pandemic causes small firms.

Why Covid-19 Pandemic Hurts Small Firms

Assume that the imaginary business described above sees its revenues go to zero. Further, for simplicity, assume the business continues to pay its overhead (rent, utilities, and so on) and its employees and then also pay out the usual amount to its owner or owners. That’s $25,000 in total each month.

The obvious thing that happens is the firm loses money. $25,000 a month. Everybody spots that. And people without business management experience assume that that’s the financial effect to focus on.

But something else happens, too. Given the $25,000 of cash disbursements, the firm burns through its $50,000 of capital in two months.

More precisely, the firm will need to spend its cash the first month. And then, in the second month, it will need to sell the truck and use the cash proceeds for expenses.

And then the firm will have to stop.

By the way? If the firm slows its spending, the firm extends its longevity. But not by much.

For example, suppose the firm terminates the employees and halves the amounts paid to the owner or owners. (Maybe two owners were each drawing $4,000 a month but they each drop that to $2,000 a month.) In that case, the firm disburses $12,500 a month for spending. But that spending rate burns through the firm’s capital in four months.

And then the firm will have to stop.

Restarting After Covid-19 Closures

You see the issue.

For a small business and its employees, restarting doesn’t just require an end to the lock down. Or a return to healthy customer demand.

Rather, restarting requires the firm to replenish its capital.

A little moving business, for example, needs a truck on day one. It also needs the cash required to pay its rent, gas for the truck, and weekly payroll since these expenses come before the customer remits payment.

That missing capital? That’s the reason that many of the millions of small businesses closed by the Covid-19 pandemic either won’t be able to restart. Or to restart quickly.

But I promised to make this quick. So no long, drawn-out requiem here. Rather, let me try to tease out some actionable insights small businesses and small business supporters can use.

Insight #1: Learn from the Scientists

A first suggestion. I think we need to start by getting our information about the pandemic from the scientists working in this area.

To better understand the details and the direction of the Covid-19 pandemic and the public health responses, I’ve been following the Twitter activity of a bunch of scientists and researchers talking about the pandemic and public health: Francois Balloux, Stefan Baral, Gabriela Gomes, Sunetra Gupta, John P.A. Ioannidis, Martin Kulldorff, Michael Levitt, Wes Pegden, Justin Silverman, and Alex Washburne.

I know. Twitter. Weird, right? But curiously, the Twitter activity of the forgoing list of scientists coupled with their published and pre-print research, and then candid discussions with each other? Wow, really useful.

Insight #2: Ask Policy Makers and Influencers to Consider Small Business Closures

Whether or not the damage and destruction to small businesses makes sense? That’s a political question our society has to work out together. No good choices. Terrible trade-offs.

But let’s ask policy makers and influencers to consider fully and explicitly the small-business-closure costs of their choices.

Insight #3: Ask for More Responsible Behavior from Media and Social Network Butterflies

A comment to journalists, reporters, and folks active in online social networks. Please show discernment and precision in your descriptions of the risks of Covid-19. Think carefully about how readers and listeners interpret your words. And for heaven’s sake, don’t exaggerate.

I recently pointed out in another blog post, Post-pandemic Covid-19 Small Business Planning, that people who should know better (including major media outlets) make wildly inaccurate statements about Covid-19 hospitalization and fatality rates in their reporting and online.

And that may matter more than one thinks at first. Lock downs aren’t the only thing shrinking the economy. Consumer worry dampens demand too. (See the earlier referenced research paper from Chetty and his co-authors.)

Accordingly, those spreading bad information contribute to small businesses failing.

Many of us get we can “mask up” to dial down the loss of life from this pandemic.

How about we also “dial up” the accuracy of the public statements we make about the Covid-19 pandemic?

Insight #4: Small Business Owners Must Protect Their Balance Sheets

If you own a business and your balance sheet is getting beaten up by Covid-19, I urge you to exercise extreme caution. Protect your balance sheet!

What most benefits you and other stakeholders (like your employees) is your firm returning to full, profitable operations.

Further, to return to your regular operations, probably you’re going to need not just for the economy to reopen and for customer demand to restart. You’re also going to need a “full-sized” balance sheet.

Very possibly, for example, you’ll need to grow your capital by first getting the small business profitable and then reinvesting some chunk of those profits.

You may be looking at a disturbingly long road here. Sorry.

One bit of good news? Rebuilding your business capital this time, inasmuch as you’re a veteran entrepreneur or manager, should go much faster than it did when you first started your business. (You know more now and should build capital more efficiently.)

Furthermore, and fortunately, government help has thus far been generous. (The Paycheck Protection Program may not have been a great way to protect jobs. But it may save small businesses by injecting them with capital.) Maybe that will continue. Keep your eyes and ears open for that.

One final thought. Keep in mind that you don’t have rebuild a mirror image balance sheet. Maybe in the post-pandemic economy, you guys operate differently. (You may this go-around need to rely more on debt—such as a Small Business Administration Economic Injury Disaster Loan.)

Insight #5: Consider Possibility Your Business Model Needs Update

The Opportunity Insights Economic Tracker website mentioned earlier—again, you want to spend some time with that tool—also highlights the dramatic drop in small business revenues over the course of the pandemic.

That drop? About 20 percent on average. Which is a face punch.

And another thing to consider? That 20 percent average decline hides the variability individual businesses experience. Different categories of small businesses experience different revenue losses. Some firms don’t get beat up at all, basically. Some get beat up so bad they don’t, or won’t, survive. (Kind of like the Covid-19 virus and people of different ages…)

But surely all small businesses need to update their approach and their plan for the future.

Look back at that imaginary small business described in the opening paragraphs of this blog post. Maybe the new normal needs to be this firm reworks its “formula” so the business works with revenues that run at 80 percent of what the firm enjoyed prior to Covid-19.

And then keep in mind that many small businesses—especially service businesses—can’t rely on price cuts to build volumes. (You need to be able to really scale up to make price-cutting strategies work.)

P.S. A Free Download of Our Business Planning Kit

By the way? It’s sort of overkill. (I created it for a book called the MBA’s Guide to Microsoft Excel a couple of decades ago.)

But we’ve got a downloadable e-book and Excel workbook you can grab for free to do business planning. We used to sell this… but who cares about that now.

If we can help even a tiny handful of small businesses better plan their way through a Covid-19 closure? No brainer.

The post Covid-19 Closures Killing Millions of Small Businesses appeared first on Evergreen Small Business.

Okay, this may sound crazy. But I’m going to say it anyway. A good chance exists you and I need to start thinking more—and thinking more optimistically—about what happens when the Covid-19 pandemic ends.

Don’t misunderstand me. This blog post doesn’t argue the pandemic isn’t serious. Or that we don’t still have terrible stuff to get through.

Rather, the blog post argues you and I may be too pessimistic about what comes next. And then it argues the reasons we have for optimism? Those reasons impact the way we plan for a post-pandemic world. And those reasons influence how we manage our small businesses over the new few months.

Two Stipulations First

But first two stipulations. In absolute terms, the world and our country has seen, and continues to see, enormous loss of life. The University of Washington’s Covid-19 model estimates that at the time I’m writing this, more than 160,000 Americans have already died with or from Covid-19. By the end of the year, that model predicts the number doubles.

To my knowledge, no widely-accepted estimate of Covid-19 business failures and closures exists. (See this article from the Washington Post, for example.) But the absolute number surely runs hundreds of thousands: restaurants and bars, gyms, preschools, drycleaners, and so on. In short, any business that didn’t have the financial resources to survive a lockdown? Gone. At least temporarily. And many never will return.

But despite the unquestionable toll on humans and business, reasons exist to keep going. And in fact, reasons exist for folks to plan optimistically in many cases. Let me go over the big ones.

Lower Lethality Than You May Think

A first, incredibly lucky break the world caught. Covid-19 displays far less lethality than originally estimated.

In February, for example, the World Health Organization estimated a nearly 4 percent infection fatality rate. More precisely, the WHO’s initial report on Covid-19 said this about the case fatality rate:

As of 20 February, 2114 of the 55,924 laboratory confirmed cases have died (crude fatality ratio [CFR²] 3.8%)

And then in the same report they indicated asymptomatic cases rarely occurred:

Asymptomatic infection has been reported, but the majority of the relatively rare cases who are asymptomatic on the date of identification/report went on to develop disease. The proportion of truly asymptomatic infections is unclear but appears to be relatively rare and does not appear to be a major driver of transmission.

With nearly zero asymptomatic infections, a case fatality rate of nearly 4 percent translated into an infection fatality rate of nearly 4 percent—at least in many journalists’ and readers’ minds.

The Our World In Data website provides interesting commentary here about early confusion concerning high fatality rates, in turn pointing to a useful summary and discussion of the confusion by the Wordometers.info website. Another useful discussion appeared in the British medical journal Lancet: Estimates of the Severity of Corona Virus Disease: 2019 Findings.)

The upshot of these initial assessments: People wondered, perhaps planned, and in some cases apparently still think the fatality rate runs much higher than it does.

One recent example of this: Harvard Law School professor Laurence Tribe’s July 6 tweet to his nearly 1 million followers that “15 to 20%” of Coronavirus cases “are severe enough to require hospitalizations and many of those never come home.”  More than 7 thousand “tribelaw” followers then retweeted the comment and nearly 18 thousand readers “liked” it. (The CDC assessments available at the time Tribe tweeted estimated 65 percent of Covid-19 infections show symptoms, that 3.4 percent of these symptomatic infections require hospitalization, and that 0.4% of this group pass pass away.)

Another more recent example? On August 13, an article at the CNBC website started with two key points, one of which said, “The coronavirus, however, has infected less than 2% of the U.S. population and has already killed at least 166,970 people.” That would reflect a 2.5 infection fatality rate–something that’s clearly wrong if the CDC is right. But the error meshes with the earliest, most pessimistic fatality assessments.

Note: I’m not linking to these two bad examples of erroneous infection fatality rate data. That only propagates the error and boosts their visibility on the web.

What are the current best-estimates of infection fatality rates? Somewhere between 0.5 percent and 1 percent. For example, the Center for Disease Control and Prevention gives its best-estimate of infection fatality rate as 0.65 percent (see here). That number, by the way, comes from a study published by researchers Gideon Meyerowitz-Katz and Lea Merone.

The two big points here: First, the high fatality rates that many people bandied about in the beginning of the pandemic? And that some people continue to echo? Thankfully, they turned out to be way too pessimistic. Infection fatality rates remain unknowable. Partly because we don’t know the true number of fatalities. Mostly because we don’t know the true number of infections. But the rates aren’t as bad as many assumed and some still assume.

Finally, as small business owners plan and manage, they want to keep in mind that much old and thankfully out-of-date data still echos through the media reporting and social media networks.

Just to say this again: That infection fatality rate is bad! But not as bad as some worried in the beginning. And not as bad as some folks continue to report and think.

A Steep Age Risk Gradient

Studies like Meyerowitz-Katz and Merone’s show something else that counts as both good and bad news—but mostly good, I think.

Covid-19 treats people differently based on age. Meyerowitz-Katz and Merone, for example, say this half-way through their research paper when talking about the studies of infection fatality rates (IFRs):

…the IFR for <70 year olds is likely lower than 0.1%, and may be less than 10x the rate of death in over-70s. Another recently published estimate stratified infection-fatality by age and found a very low risk for under 50s that increased exponentially with age from 0.0016% <50 years to 0.14% for 50-64 year olds and up to 5.6% for those 65 years and older (60).

That insight suggests that business owners and workers, parents and their children, have more room to navigate this pandemic than some think.

For example, this insight probably helps us all better manage personal and business risks. That’s a weird thing to point out. But if the risks for older neighbors, family members, friends, and colleagues run ten or twenty or thirty times the risk for younger folks, it is good we know that. Really good.

Better Drugs, Better Treatments, Promising Vaccine Research

Something else to factor into planning for the future? Physicians and medical researchers are finding better ways to treat people infected by Covid-19.

For example, the drug remdesivir appears to significantly improve recovery. Gilead Sciences reported recently that a study of 1,100 patients suggested the drug reduced risk of death by 62 percent and accelerated recovery for roughly 15 percent of patients.

Dexamethoasone, a corticosteroid, seems to reduce fatalities by about 30 percent for people on ventilators and by about 20 percent for people needing oxygen (more information here).

Research and study continues on other treatments and drugs. I guess the main point here is, medicine didn’t stand still. It moved quickly and impressively to find treatment options that improve outcomes.

A related reason for optimism. A number of promising vaccine developments appear well underway. Most may fail of course. Maybe no early vaccine will prove highly effective. But here again, progress continues. (See this New York Times article for an up-to-date Covid-19 status report.)

What this means for your small business isn’t clear. And please don’t interpret this comment as me ignoring the trauma and crisis you and your business may already face. But you have reasons to be hopeful about the future and the future of your small business. Especially next year.

Heavy Federal, State and Local Government Support

Small business owners—often for good reasons—complain about how government treats them. Keep this under your hat, but I may have even complained a bit in past. However, one can’t say government hasn’t provided enormous support to small businesses during this pandemic. That counts as welcome news.

Over the last few months, for example, we’ve blogged extensively about one bit of the U.S. response to Covid-19, the Paycheck Protection Program (PPP) loans. The PPP provided massive support for small businesses and their employees. Roughly half a trillion dollars. Or restated another way, about 5 million small businesses received forgivable loans averaging about $100,000 each so they could keep people on the payroll, the doors open, and the lights on.

And the federal government provided a bunch of other support mechanisms for businesses, too: Economic Injury Disaster Loans, the Federal Reserve’s Main Street Lending Program, support for the airlines to continue operations and employment.

States and local governments don’t have the financial firepower to subsidize financially small businesses. But they’ve regularly been able to help in other meaningful ways. States like California have allowed small businesses to delay paying taxes. And local governments have found their own ways to help to small businesses. My home town, Redmond, Washington? Never prouder of those folks for developing their temporary outdoor dining permits, which allow restaurants and bars to add safe places to eat and drink.

The actionable insight here? Stay alert to the support programs that federal, state and local governments continue to provide. Every little bit helps.

Substantial Support from Still-operating Businesses

A shout-out to the still-operating businesses who’ve put their shoulders to the plow.

Many CPAs serving small businesses have provided hundreds of hours of either deeply discounted or free help to clients and non-clients.

Many banks have done the same. Wells Fargo, for example, redirected the hundreds of millions of dollars of gross PPP loan fees it earned to small business support programs. JP Morgan Chase, Bank of America and Citigroup have indicated they will donate their net fees. (More detail here.)

And I’m sure a bunch of other businesses, big and small, have stepped up.

I’m not exactly sure how this other support impacts you planning and managing. But I think it probably does.

Herd Immunity Thresholds Very Possibly Lower

One final thing to mention here: It’s possible the herd immunity thresholds fall much lower than folks thought at first. But let’s talk some crude numbers just to illustrate the math.

Using easy percentages and big round numbers, suppose a virus with a 1 percent infection fatality rate runs wild through a country of 300,000,000 people. You might guess, or worry, that means 3,000,000 die if the country can’t damp down the contagion. (The formula you use to make this calculation is .01 times 300,000,000.)

But it turns out that due to herd immunity, not all 300,000,000 people actually get infected. Maybe only 50 percent do. Or 75 percent. That’s still a lot. But less than 100 percent.

Note: The current CDC planning scenarios (see earlier links to CDC planning scenarios) suggest a herd immunity threshold range of 50 percent to 75 percent.

The basic formula used to calculate herd immunity thresholds works simply. (See here, for example: Herd Immunity: Understanding Covid-19.) But a growing number of researchers, based on the character of the virus, other diseases, and their models, think Covid-19 herd immunity threshold falls way below that basic formula’s calculation.

One peer-reviewed study says Covid-19 herd immunity may run around 43%. (Article here: The disease-induced herd immunity level for Covid-19 is substantially lower than the classical herd immunity level.)

Nobel laureate and Stanford professor Michael Levitt estimates the herd immunity rate is around 30 percent (see here: Is the Covid-19 Pandemic Self-flattening or Will it Grind Relentlessly On.)

Another study (not yet peer-reviewed but widely discussed) estimates that herd immunity thresholds run more like 10 to 20 percent (Article here: Individual variation in susceptibility or exposure to SARS-CoV-2 lowers the herd immunity threshold.).

At this point, researchers are still only debating the possibility that the Covid-19 herd immunity threshold falls way below earlier estimates. (See this article from MIT Technology Review, for example: Population immunity is slowing down the pandemic in parts of the US.)

But if you manage a small business? If you’re trying to plan for the future? You want to be aware that a return to the new normal may be closer than you think. Furthermore, you do not want to bet big that pandemic ends only far into the future.

Three Small Business Covid-19 Planning Takeaways

The preceding paragraphs cover ground a small business owner or manager usually shouldn’t have to ponder. And as uncomfortable as you are reading this? Hey, I bet I’m more uncomfortable writing it.

But let me present three final planning takeaways because, unfortunately, other better sources don’t seem to exist.

First, if you haven’t been updating your business plan and strategic thinking for the latest science, you want to do that. Not just the size but also the shape of the pandemic has come into sharper focus over the last few weeks. You want to update your thoughts on the pandemic’s impact on your firm.

Second, I think we small business owners follow the CDC’s approach to planning and so develop more than one scenario. Maybe a worst-case scenario, a best-case scenario and then a best-guess scenario. We can probably plagiarize the CDC’s scenarios for most of the Covid-19 stuff. And then we can try to come up with the specifics of how the pandemic and its fallout impact both our industries and then our small firms.

Third, consider and maybe work from the assumption that just as Covid-19’s impact on individuals varies greatly, the impact on individual small businesses varies greatly. In discussions with clients, other CPAs, small business friends, and blog readers, we’re hearing that the Covid-19 pandemic hits some firms really hard. But not others. A few firms even see their fortunes improving. So recognize that possibility.

Other Resources

I’ve tried to link to a bunch of relevant resources in the body of the post above, but a handful of other resources may be interesting for some readers.

The podcast from the Paradocs website of an interview of Mathematics professor Gabriela Gomes about her research into herd immunity thresholds for Covid-19 is a really easy way for non-mathematicians to learn the details of her work.

Stanford University professor John Ioannides’ early constructive criticism of the pessimistic infection fatality rates deserves highlighting: The infection fatality rate of COVID-19 inferred from seroprevalence data.

Justin D. Silverman, Nathaniel Hupert, and Alex D. Washburne’s  early prescient insights do too: Using influenza surveillance networks to estimate state-specific prevalence of SARS-CoV-2 in the United States.

Finally, Nobel laureate and Stanford professor Michael Levitt’s preprint paper, Predicting the Trajectory of Any COVID19 Epidemic From the Best Straight Line is interesting. Note that Levitt’s paper cites the paper from Silverman, Hupert and Washburne.

The post Post-Pandemic Covid-19 Small Business Planning appeared first on Evergreen Small Business.

A second awkward admission: One of my favorite categories are the car shows.

And that brings me to the subject of the Netflix series, Fastest Car, and the lessons the show holds for small business owners and entrepreneurs.

So, I’m going to talk about that. The last few blog posts covered COVID-19 issues. I figure it’s okay to start thinking about what we do when the storm passes and we all work to hit the gas and either restart or bring up our businesses back up to full speed.

The Fastest Cars Series Concept

The format of the Fastest Cars series is simple. Four cars race on a quarter mile track. A drag race, in other words.

One of the cars? A super car costing, often, hundreds of thousands of dollars. A Lamborghini. Or a Ferrari. Or a McLaren.

The other three cars? Well, usually, the owner buys an old car or truck for a few hundred bucks and then invests gobs of time, money and talent turning that vehicle into a rocket.

And here, if you’re worried about me spoiling the show’s surprises, you want to stop reading.

Spoiler Alert: Read No Further If You May Watch Show

Probably, you can guess what I’m about to say next…

You can’t predict who wins a given race. In other words, the guy with the $300,000 supercar? The car with the V-12, 600 horsepower engine?

Yeah, he may get beat by the guy racing in a twenty-year-old econobox he’s rebuilt in his garage.

Car folk probably like the show because it’s so fun to see the cars, especially the garage-built racers.

But you know what? I think small business owners can take actionable insights from the show’s stories.

Insight #1: Segmentation Works

A first actionable insight?

This: If you’re going to compete against a giant company with hundreds of millions of dollars to spend on research and manufacturing, compete in a narrow niche. And then optimize for that niche.

The garage-built racers optimize for one situation: A quarter mile drag race.

The super car manufacturers, well, they build these beautiful cars. Sure. Their vehicles deliver astonishing performance. In a bunch of situations. Including a quarter-mile drag race.

Because the garage-built racers focus on a single situation, however, they can often beat the super car in that single situation.

And then how this applies to a small business? Well, if you can optimize for a niche, you can probably (possibly?) beat some bigger competitor within that niche.

Insight #2: The Team Matters

Another insight: After binge-watching two seasons of Fastest Cars, I will confidently say that the team someone assembles matters. And a lot.

The racers who assemble small teams of hardcore car mechanics and racing enthusiasts? These guys perform really well.

Small businesses struggle to do this team building. But a team of strong players, who work well together? Yeah, that seems to be strongly correlated with racing success.

A reminder at this point: Remember I provided that earlier spoiler alert…

Insight #3: Driver Skill Matters

One final actionable insight to suggest: Driver skill matters a lot.

So, just to say this, someone who goes out and spends more on a car than most people spend on a home?

That person may think the giant engine, sophisticated traction control and computer-controlled launch modes make a difference.

But driver skill matters. And driver skill often levels the playing field against someone competing on the basis of their bank account.

And so the small business lesson I think we take away from this observation? The skill and experience you and your team possess can let you compete. Even against rich competitors working with all the latest and most expensive technology.

Hope you and your family are staying safe and healthy. And do start thinking about what you do when the storm ends.

The post How to Beat a Super Car in a Race appeared first on Evergreen Small Business.

She pointed out the print books I’ve written (like “QuickBooks for Dummies”) and then the downloadable do-it-yourself incorporation kits we sell encouraged tons of people to start a small business.

Her feeling? Now seemed like a good time to offer encouragement. And better yet, some actionable ideas for getting through this global storm.

Fair enough. And here are my thoughts.

Remember You Planned For This (Maybe)

A first thought. This stock market meltdown and economic slowdown? You may have already prepared for this. And you should take deep comfort if that’s the case.

No, no, I get no one can completely prepare for something like this. But ask yourself the following questions:

Had you worked to strengthen your small business’s balance sheet? Reduce your debts?

Had you tried to stash away a meaningfully large rainy day fund?

In retirement plans, did you diversify and hold bonds? Had you thought in terms of “safe withdrawal rates” for retirement.

What about the idea that you could use a “variable withdrawal rate” in retirement, meaning, sure, you’d like to live on “X” but you can make 90% of “X” work, too?

Do you have a trick up your sleeve to dial down your small business or household cash burn rate?

To the extent you or I can answer any of these questions “yes,” we’ve prepared.

If you thought through the preceding issues, hey, this won’t be pleasant. But your small business and family may get through this storm just fine. Or nearly so. Good job.

Learn Any Lessons from This Moment

A quick, related thought: If you or I didn’t prepare the way we should have? Okay, not so good. But we need to learn from the moment.

After this is all over? We will see more disruption. New crises will appear down the road. Next time, we can do an even better job of being prepared.

Create Business Plan for Worst Case Scenario

Now a comment directed specifically at your small business operation.

You want to update your business plan. And in particular, I suggest, you pay attention to two scenarios.

The first scenario to look at? The worst-case scenario. Look at what damage you’ve already suffered. Assume this all gets worst over the coming weeks and months. Figure out what you can do to limit the damage. See if you can and how you can slog through this rough patch.

If you haven’t been good about your business planning? Yeah, now’s the time to get going. Grab the historical financial information you have about your operation. (So your QuickBooks data. Or your Xero data.) Put that information into a spreadsheet. Start modeling what-if situations: you lose 20% or 40% of your revenue. A big customer fails. Collections slow down. Stuff like that.

Sidebar: Years ago, I wrote a book for MBA students learning Microsoft Excel. It included a bunch of business planning spreadsheets. You can visit our CPA firm’s website and download free spreadsheets from this book including a Profit Volume and Break-Even Analysis Starter workbook and a Business Planning Starter workbook.

A surprising reality? A firm typically generates cash as it shrinks in size. Accordingly, with some savvy planning, your challenges may not be as bad as you worry right now.

Remember: You don’t need to thrive over the coming weeks or months. You just need to get to the other side of this.

The one big sobering thing you need to identify? The point at which your firm fails. Know where that cliff is. Don’t drive over the cliff. Or to put this into more practical terms, don’t burn through all your savings trying to save or salvage the business. Don’t, for example, pay some vendor or landlord or yes even an employee money you need for a bankruptcy attorney.

Tip: Congress is “fire hosing” small businesses and individuals with cash, loans and other assistance. Make sure you know what other resources you have available as you think about your worst-case scenario options, including the new COVID-19 small business tax breaks, the COVID-19 employee retention credit, and new loan programs like the paycheck protection loans.

Create Business Plan for Best Case Scenario

The second scenario you must consider? The possibility that your business, contrary to what everyone might guess, actually ramps up. But you know this stuff happens too, right?

Some firms will experience a boom in demand as a result of the corona virus crisis. Obvious examples include healthcare providers, their suppliers and then the firms that provide them services.

And other firms, ironically, will see their opportunities expand. If you’re in this situation, plan.

The one big sobering thing you need to identify with a best case scenario? Surprisingly enough, the point at which your firm fails. No, I know, weird right? But if you experience explosive growth in your firm because of cataclysmic economic changes, you probably can’t grow your business without limit. You need therefore to know the limit.

A growing business consumes cash. Just to give an example, some firm that wants to make a tenfold increase in its production of face masks probably needs to “10X” its work force, its inventory, factory machinery, and working capital… and all weeks or months before customers pay for the face masks.

The general rule of thumb goes like this: You can’t sustain growth faster than you can grow your balance sheet. Make sure you know where the cliff is. And don’t drive over the cliff.

Use the Crisis as a Catalyst

I cringe when people say, “You don’t want to waste a crisis.” The idea is, in a crisis, you can make changes that in normal times you can’t.

But you know what? People say this because it’s true. And you and I need to look at taking those steps we know we should take but just never do because, well, you know. Too awkward. Bad timing. Stuff like that.

By the way? I don’t mean here you downsize your workforce. I mean, yes, maybe you need to do that. (Let’s exhaust the other options first, okay?)

But what I’m talking about is changing the way you or I operate. In some fundamental way.

An example: Some small “tax return centric” CPA firms talk about discontinuing the practice of having individuals come into the office for an appointment as the “first step” in preparing a tax return. These firms want to push clients and accountants to end what is, unquestionably, an inefficient extraordinarily expensive step. (The right way to get information to your accountant is digitally, using a portal.)

These firms should make this change. And probably others.

Sidebar: Are you old enough to remember when doctors made house calls? I barely am. But I remember fifty years ago riding with my dad, a pediatrician, as he visited the home of a family with a sick child. That might have been his last house call. I also remember people at the time complaining that, gosh darn it, you couldn’t find doctors who made house calls anymore. But that was a crazy way to practice medicine.

See therefore if you can end any of the crazy stuff you’re still doing. I’ll try to do the same.

Create a “Plan B” for Retirement

Were you close to retirement? Has this stock market meltdown torpedo-ed your retirement “Plan A”?

That sucks. But while a period of economic grief makes sense, let me throw out this idea: You can come up with a “Plan B” for retirement. And probably more easily than you might imagine.

You don’t need to do that this coming weekend. But over the next months or year, as the picture comes into focus, look at where things are. Think about whether your retirement “Plan A” still works. If it doesn’t, okay, figure out a “Plan B.”

By the way? Lots of people have historically had to figure out a “Plan B.” For what that’s worth.

Plan Beyond the Crisis

A final idea. I think you and I need to be planning for what our small businesses look like after this crisis.

No, no, I know right now we’re all thinking about the next few weeks. Of course. But we don’t want to get stuck in the moment.

You can probably plan for (and so rely on) the income and profitability you’ll earn after the crisis passes to get back on track financially. Maybe this income becomes part of the way you make your retirement “Plan B“ work. Or future profits repay the loans you use to get through this.

You may also be able to cut spending or sell assets after the crisis passes. Use the money to get back on track. Be alert to these sorts of future possibilities.

You don’t need to solve every problem or address every issue right now. Some questions you and I can wait to answer. (Er, obvious comment: Now does not seem like the right time to sell assets at bargain prices. So don’t liquidate assets today unless you can’t possibly avoid it.)

Some Other Small Business Corona Virus Resources

A while back, I blogged about applying former Treasury Secretary Timothy Geithner’s “stress test” concept to small businesses. What Geithner did for the banks in the Great Recession makes sense to think about for your small business: Stress Tests for Your Small Business.

We talked about reacting to and planning for a bear market here: Bear Market Survival Tactics: Ideas from David Swensen’s Book

Planning for an appropriately-sized rainy day fund gets tricky for small business owners. But here are some thoughts to help you work through this riddle: Small Business Rainy Day Funds.

We did a blog post series on why someone needs a “Plan B” for their retirement. It starts here: Retirement Plan B: Why You Need One. Other follow-up posts appear here and here and here.

If you’re close to retirement, you might also consider delaying your Social Security benefits as a way to extend your portfolio longevity. This blog post explains why this counter-intuitive approach works for many people: Delay Social Benefits to Bump Your Safe Spending Rate in retirement.

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