- Prepare for talent disruption by considering interim executive resources, and by evaluating how functions are operating virtually. Parts of the accounting and finance function may be operating effectively in remote locations, while others may require intervention.
- Bolster liquidity by understanding and managing your short-term credit, cash, and performance needs. A strategic focus when combined with well-thought through tactical plans to drive operational and cash flow improvements, including a 13-week cash forecast, should provide sound direction.
- Increase communication with your critical stakeholders, including employees, customers, suppliers, auditors, regulators, and the SEC. It is said that one should err on the side of over communicating. In times of crisis, we suggest that this is truer than not.
- Review and manage all risks in the organization to ensure that a less obvious risk doesn’t catch the organization off guard and hinder recovery or growth plans.
- Conduct a cost reduction review of all areas of the company. This may be a time to take cost reduction actions that may have been postponed during good economic times.
- Review your financial reporting to make sure it continues to serve the needs of the company during times of distress. It is said and I paraphrase, if one can’t measure the results of an action, then we don’t know if the action produced the expected result. There may also be specific reporting issues that come to the fore, such as asset impairments and going concern analyses.
Challenge — Difficulty Getting the Books Closed
Action Plan — Fill Resource Gaps and Re-introduce Closing Discipline
- Plan for an adequate level of resources as a better alternative to late reporting and reporting errors, by either hiring additional staff or enlisting operations and other resources to contribute as a regular part of the closing process
- If temporary resources are used, integrate those resources into the full-time team and make sure regular communication is taking place among the extended team members
- Make sure roles and responsibilities are well defined, in writing, including review responsibilities
- Develop a closing calendar with input from all affected team members; the focus should be on what is achievable, and expectations on timing of deliverables should be set realistically
- Communicate the timing and nature of deliverables to senior management
Challenge — Integrating Information from Outside the Financial Process
Action Plan — Regularly Reconcile Estimates with Actuals and Improve Critical Processes
- Reconcile estimates to actuals regularly (at least quarterly), to avoid a year-end crunch that will delay year-end reporting and raise concerns from auditors or investors and directors
- Get representatives of the operations and finance teams together to for a process improvement project. This can be a high-level gap analysis – an honest assessment of the current process vs. desired process and agreement on how to fix the issues. The detailed approaches of the Six Sigma, LEAN, or Continuous Process Improvement (CPI) methodologies are also useful.
Challenge — Little Staff Development, Communication, Documentation, and Training
Action Plan — Formalize Annual Finance Team Development and Back-up Plans
- The Chief Financial Officer (CFO) should create a succinct written plan for the closing process. The document should address role descriptions, critical processes performed, and the back-up person for each critical process.
- Review the plan with the finance team and senior management to ensure that critical processes are not overly concentrated with one person, especially the CFO, revise as needed and ensure that plans are made to close any skills gaps.
Subchapter V of the Bankruptcy Code and How This Can Help Small Businesses
In this time of uncertainty, companies must plan for every conceivable outcome. Small companies in particular are especially vulnerable and must assess all tools at their disposal in order to survive.
The purpose of this newsletter is to highlight a new provision of the Bankruptcy Code which can be a lifeline to small businesses. We intend to provide you with an overview of the features of the newly enacted Subchapter V of the Bankruptcy Code so you can understand this alternative as a means to survive the current crisis. The information presented below is for informational purposes only and should not be considered legal advice or opinion, which should only be sought from an attorney.
Subchapter V is part of the federal Bankruptcy Code that came about from a new law called the Small Business Reorganization Act of 2019 on February 19, 2020. Subchapter V is aimed at small business corporate and individual debtors, and it is intended at reducing the complexities of Chapter 11 by increasing efficiency, lowering costs and easing the plan confirmation process.
Initially, Subchapter V was limited to a person or entity with total debt of less than $2,725,625. The CARES Act raised this amount to $7.5 million; this higher amount will only remain in effect until one year after the effective date of the CARES Act, i.e. March 27, 2021. The one exclusion to Subchapter V is single asset real estate entities.
The advantage of a Subchapter V filing over a Chapter 11 filing includes the following:
There are no fees, apart from an initial filing fee. Also, administrative expenses may be paid over the life of the plan (as opposed to the date of the plan confirmation as with Chapter 11 filings).
Filing requirements are the business’ most recent balance sheet, statement of operations, statement of cash flow and tax returns, or a sworn statement that such documents do not exist.
Subchapter V has no creditor committee, unless the court orders otherwise.
The petitioner will submit the plan to the court and, if it meets certain requirements, it will be accepted by the Court.
Under a typical Subchapter V filing, the chronology of events is as follows:
A status conference will be held in bankruptcy court within 60 days of filing;
The debtor must file a report detailing efforts to reach a consensual plan of reorganization no later than 14 days prior to this conference, and;
The plan must be submitted for approval within 90 days. Extensions may be granted where there are circumstances for which the debtor cannot be held accountable.
The plan will generally be confirmed as long as all disposable income for the ensuing 3-5 years will be used to repay creditors.
If creditors can’t agree on the petitioner’s proposed plan, the Bankruptcy Court Judge may be asked to order the plan approved (a “cram down”). The success of the proposed plan would need to be demonstrated to be more attractive to unsecured creditors than a conversion to a Chapter 7 liquidation plan, which is usually very easy to be made.
A small business owner may continue to operate post filing as a debtor-in-possession and must continue to file the schedules and statements required of all debtors under the applicable section of the Bankruptcy Code. However, the court can strip a small business debtor of its debtor-in-possession powers for cause such as fraud, dishonesty, incompetence or gross mismanagement, either before or after the bankruptcy case or for failure to perform the obligations specified under a confirmed plan. In such an event, a Small Business Trustee would take over the operation of the business.
In summary, the advantages of Subchapter V over a Chapter 11 filing are costs, ease of filing requirements, ability of the owner to prepare the reorganization plan without having the involvement of a creditor committee and relative ease of confirmation by the Court as long as certain hurdles are met.
For business owners who are undergoing challenges, we hope that your firm will be able to successfully withstand the current crisis and be able to return to normalcy in the near future, and that you will not need to consider Subchapter V. However, we encourage you to consider this alternative if it can result in your firm’s survival. CFO Consulting Partners can assist you in seeking legal advice and assistance from our broad network of contacts in the legal field.
Finally, we wish the best to you and your loved ones for safety and continued good health.
The content of this newsletter is meant for general information purposes and is not to be considered legal advice or opinion. As with any bankruptcy or restructuring filing, you need to consult with an attorney to cover your own unique situation and circumstances.
By Mark Sloan, Director, CFO Consulting Partners, firstname.lastname@example.org
David DeMuth, Sr. Managing Director, CFO Consulting Partners, email@example.com
Thinking Ahead – Accounting for Loan Losses During and After Covid-19
One of the many challenges posed by the current health crisis is the need for lenders to reassess their borrowers’ ability to repay their loans. While it may seem unfair, or even unseemly, to have to address this issue at this time, financial institutions will need to do exactly that in closing their books and reporting on the First Quarter of 2020 in their regulatory reports and (for SEC registrants) Forms 10-Q.
The accounting approach most community institutions are following, and on which we will focus here, is the traditional, probable incurred loss model. This model requires institutions to provide for losses that are probable to have been incurred under the GAAP literature in Accounting Standards Codification (ASC) 450, Contingencies, and 310, Receivables. In practice, this usually involves a modeled component, based on historical write-offs over a look-back period, and a qualitative component, based on the current state and trend of economic and other factors affecting the portfolio. A good summary of the factors to be considered in this qualitative analysis are the nine points summarized in an Interagency Policy Statement issued in 2006 by federal banking agencies, which can be found at this link: https://www.occ.gov/news-issuances/bulletins/2006/bulletin-2006-47a.pdf
Generally, increased loss provisions are expected but likely too few facts are available to make specific loss assumptions. Measuring specific incurred losses at the end of Q1 will be difficult and most likely will be addressed through additional qualitative factors. Reserve assumptions for those credits already under analysis should be reevaluated and likely dealt with across product and delinquency categories.
Following are the nine points from the Policy Statement, in italics, followed in each case by our comments:
1. Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses. This would include loan forbearance and other regulatory relief measures enacted to assist with resolution of the crisis: https://www.fdic.gov/news/news/press/2020/pr20038a.pdf
2. Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. The effects of the current health crisis will be pervasive, as covered in the other points.
3. Changes in the nature and volume of the portfolio and in the terms of loans. Institutions will need to address any shifts in new lending – in some portfolio segments, new production will have stopped, and thus not be available to offset increased non-performing loans and normal amortization within those segments. Thus, looking forward and doing the math, loss rates will increase within these portfolio segments.
4. Changes in the experience, ability, and depth of lending management and other relevant staff. Will there be sufficient staff available to effectively manage the portfolio? Will remote collection efforts be as effective as prior techniques?
5. Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans. A sharp increase in delinquencies can be expected, albeit delayed by the TDR forbearance mentioned above. The ultimate losses may be mitigated by any government guarantees that are available, as well as borrowers’ ability to access business interruption insurance.
6. Changes in the quality of the institution’s loan review system.
Improvements that strengthen the process of reviewing loans could be a mitigating factor. If however, the loan review process weakens, either because of staff illness or other limitations, this factor may be another reason to strengthen reserves.
7. Changes in the value of underlying collateral for collateral-dependent loans. Real estate loans will be a challenging area, as the impact of current developments on the commercial and residential real estate markets will take some time to shake out, however declines in market values seem likely.
8. The existence and effect of any concentrations of credit, and changes in the level of such concentrations. The effect of concentrations can become more severe as conditions in certain industry sectors worsen, and the relative size of concentrations can become larger as healthier loans run off in a low origination environment.
9. The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. These factors include forbearance that is enabled by legislation e.g., restrictions on foreclosure that lead to increased losses from deterioration in the physical condition of properties and/or in the property market.
Your portfolio consists of two types of borrowers: healthy and current borrowers who may be negatively affected by the duration and severity of the current crisis; and those already exhibiting financial stress (past due and delinquent accounts, businesses already under severe attack from a variety of sources including the lack of a viable internet strategy, lower cost of foreign competition, and many others) for which the current crisis may finalize their situation. Both may benefit from the governmental assistance and forbearance programs, however the exclusion from TDR accounting applies only to the former borrowers. You should track and maintain records of your borrowers’ status throughout the deferment and modification process in order to demonstrate those which are not TDRs.
We have discussed the challenge of first quarter reserving with senior representatives from several large accounting firms, and the following pieces of practical advice emerged:
* Now is not too soon to begin discussing reserving considerations with professional service providers, including auditors and consultants.
* Most institutions are targeting timely filings of their First Quarter reports, notwithstanding the grace periods being offered by regulators, including the FDIC and SEC. See the announcement of the grace periods at:
* Auditors, regulators, analysts and other interested parties will be looking for a strengthening of the environmental/qualitative reserve, along with supporting evidence that identifies the impact of current events and links to any adjustments.
* Whatever process is followed, it will be necessary to step back and consider whether the result makes sense.
* Whatever answer is arrived at for First Quarter reporting, further adjustments will undoubtedly be required in the Second and Third Quarters as more information becomes available.
We are familiar with these issues and accustomed to working remotely. Please let us know if we can help in any way.
Note on CECL: Institutions that have adopted the new Current Expected Credit Loss Model in the First Quarter will have similar considerations, but with the additional challenge of adopting the new model. They should also consider the possible impact of the CARES Act on timing of adoption, and related regulatory actions, including the Federal Institutions Letter on the interaction between timing of adoption and capital relief:
Larry Davis – firstname.lastname@example.org
Paul Karr – email@example.com
Eric Segal – firstname.lastname@example.org
- In an article, titled “Insurance Coverage Issues Related To Coronavirus,” by Christopher Loeber, a partner at Pryor Cashman, Loeber lists three essential steps that should be taken by all corporate policyholders.
- Review and understand your insurance policies.
- Enlist the assistance of insurance professionals.
- Tender claims promptly but pursue coverage patiently.
- In the article titled “Insurance Considerations in Light of COVID-19,” authors, Cecelia Lockner and Carl E. Metzger, partners at Goodwin Procter, discuss insurance-related issues relevant to clients dealing with the outbreak. They highlight the three key issues small businesses need to consider.
- What type of losses might be covered by insurance.
- Claims under insurance policies in the wake of the COVID-19 Outbreak.
- Negotiating and Underwriting Insurance Policies During the COVID-19 Situation.
- In an interview of Finley T. Harckham on Bloomberg, Harckam discusses the role of insurance in a virus fallout. Harckham offers options that businesses should use to ensure against risks like the COVID-19 and the role of insurance in managing virus business interruptions.
- In the Fortune article titled “How Blockchain Will Shake Up the Financial World: 5 Questions for Author Alex Tapscott,” Jeff John Roberts interviews Alex Tapscott about some of the impacts of blockchain technology. Alex Tapscott is a best selling author who is most famous for his book Blockchain Revolution. Alex Tapscott discusses the three main pillars of our modern society who are deeply invested in blockchain; the civil society, governments, and private industry.
- In an article published by Wharton Business school, titled “How Blockchain Will Redefine Supply Chain Management,” Stefan Gstettner is interviewed about the impact of blockchain on supply chain. Stefan Gstetner is a partner and associate director at Boston Consulting Group and he expects blockchain to have the greatest impact on dispersed networks with many participants.
- Chris Gaetano of NY’s Society of CPA’s explained the speech of Val Steed, CEO of K2 Enterprises, in the article “Blockchain Won’t Save the World, But It May Save Your Business.” In Val Steed’s speech, he summarized all of the benefits for your company that can arise from blockchain.
- Eric M. Ross published an article, titled “Hitting the Wall,” in which he mapped out the typical timeline for companies as they grow and expand. In order for companies to remain profitable and have continued growth in sales after they’ve hit the wall, Ross explains the key areas of focus, which are:
- Management approach
- Organization, processes, and systems
- Working capital availability
- The most suitable person to understand how to predict when a company will hit its wall would be someone who has been there before. In an article from Inc. Magazine, also titled “Hitting the Wall,” the founder James Bildner of J. Bildner & Sons explains what indicators to look for before a company hits the wall. He stresses that the main theme for all companies that reach this point of stagnation is the same, poor cash flows.
- In Mike Rogers article, “How to Avoid Hitting the Growth Wall,” he dives into the management techniques that can be detrimental for companies as they grow. He lists the five management practices that he feels stalls growth:
- Treadmill Mentality
- Management by Insanity
- Rear-View Mirror Management
- Management by ESP
- Midas-Touch Management
Insurance Update – Includes our Takeaways from the Annual SIFM Conference
- For probability of default, where the insurer has no history of having experienced defaults in its reinsurance arrangements, it may be necessary to use industry statistics;
- For amount of loss in the event of default, the required reserve may not be very sensitive to this estimate if the probability of loss is low.
- As brokers perform due diligence on acquisition opportunities, client agreements should be reviewed to ensure that these agreements allow for transfer of the contract to the acquiring company. Otherwise the acquiring company could experience more rapid client attrition than anticipated.
- With the reduction in tax rates, as companies model acquisition opportunities, companies should be sure to incorporate these lower rates in the net operating loss forward calculations
- Brokers need to thoroughly understand the terms of their Carriers’ Supplemental Compensation Agreements. A worthwhile exercise is to read each agreement and recompute the amount that should have been received for each of the last few prior payment periods. Then compare these calculations to the computations provided by the Carrier.
- Some companies are using expedient methodologies to allocate corporate overhead across business units or products – i.e., the allocation of overhead as a percent of revenue. In other cases, when business drivers are utilized to allocate these costs, expenditures needed to support the rapid future growth of one product are inappropriately distributed across all products. This occurs because current period business drivers are used to compute the current period cost allocations. As a result of these two allocation approaches, Product and Business Unit internal reports could be inaccurate.
- Business intelligence tools and complex spreadsheets are often used to provide additional analysis. Financial information on these additional profit segments is used to make key decisions for business in a particular geography, industry, sub-product, or marketing channel. Control and review processes must be established in order to prevent the same revenue from being counted twice or partial capturing of certain costs.
Streamlining financial control and reporting is crucial for a company’s success and ability to drive change. How robust is your accounting system?
Below are recently published articles related to ERP Software:
- Does your company need an ERP system? Glenn Tyndall in “The Real Cost of an Enterprise Resource Planning System” defines an ERP system as “a suite of software packages that can perform accounting, product planning and development, manufacturing, inventory management, sales management, human resources, and other business tasks,” and dives into costs of the system including:
- Development for Customization
- Process Redesign
- Eric Kimberling in “What are the Top ERP Systems for 2019” analyzes the best accounting systems for small to mid-sized companies taking into account “market share; ease of implementation; maturity, flexibility, and scalability of solutions; ease of integration to third-party systems; ease of organizational change management and training; strength of vendor ecosystem; and average time to benefits realization” to rank the best ERP Systems.
- Lori Fairbanks in “Best Accounting Software and Invoice Generators of 2019” evaluates affordable, easy-to-use accounting programs designed for startup and small companies summarizing pros and cons for over 30 different systems.
CFO Consulting Partners does not endorse any particular accounting system nor does our firm have any connection, direct or indirect with any particular software developer or value-added reseller. We do assist companies in evaluating its financial management needs and in recommending a best fit. Please feel free to reach out to Allan Tepper, Senior Managing Director, at (646) 650-2028 x701, or by email at email@example.com.
By Zach Gould, CFO Consulting Partners
Following the trend of our latest newsletter, AI and Machine Learning, this newsletter will focus on the growth of FinTech in 2019.
Deloitte defines financial technology (“FinTech”) as “digital innovation in the financial sector. At its inception, the understanding of FinTech was limited to innovative ways of facilitating payments and transactions. Underpinned by revolutionary shifts in internet and mobile technology in recent years, the realm of FinTech has witnessed explosive growth. Nowadays, it refers to a wide variety of technological interventions within the financial services arena, such as crowdfunding, online customer acquisition, mobile wallets, P2P lending, MPOS (mobile point of sale), MSME (micro, small, and medium enterprise) services, personal financial management, private financial planning, Blockchain and cryptocurrencies. FinTech is also used to describe businesses that aim to provide financial services by making use of software and modern technology.”
Below are recently published articles related to FinTech:
- Antonio Gara in, The Future of Wall Street: FinTech 50 2019, analyzes the Forbes FinTech 50 and provides a brief description of top FinTech firms, what they do, who their users are, and how much they’re worth.
- In The Fintech Revolution: Who Are the New Competitors in Banking, Eloi Noya looks at three common characteristics that threaten incumbent banks:
- Focus on a single product
- Use of advanced technology to achieve a competitive edge
- Clear customer orientation with a focus on solving users’ problems
- Should FinTechs be regulated like banks? Maybe it levels the playing field, or maybe it paves the way for FinTech’s to have direct access to the payment system?
By Zach Gould, CFO Consulting Partners