(This post originally appeared on The Guardian)
Accounting is boring. But if you’re running a small business, I suggest you pay attention to this very serious accounting issue.
While many small businesses are struggling to stay afloat as the pandemic continues its wave across the US, many others are facing a different dilemma: accounting for the virus. It may not seem like a big deal right now, considering all the other challenges we face. But it’s a looming one that could affect the financial status – and credit availability – of many in the months to come.
Millions of small businesses and non-profit organizations are required to issue annual financial statements. Banks and other financial lenders use these financial statements to determine whether or not to approve loans. Investors look to this data when evaluating where to put their money. Regulators examine financial statements in order to authorize an organization’s status. Credit bureaus and ratings agencies review this data to determine a company’s credit rating, which in turn affects its ability to borrow, both from banks and suppliers. And, just as importantly, smart business owners and their managers look to the financial data in these reports in order to effectively run their businesses.
But all of this data has, in many cases, been seriously affected, thanks to Covid. Revenues are down significantly. Assets have been impaired. Expenses are out of whack. Contracts have been amended, renegotiated or in some instances, ignored.
Which raises serious questions for small business owners. How do you reflect the impact of the coronavirus on sales when comparing to other periods? How do you show the money received from government relief such as the paycheck protection program or state and local grants? How do you treat the tremendous tax credits made available under the Cares Act or explain why payroll numbers fluctuated so significantly period to period? How have location closures, the loss of customers, the interruption of supply chains, the delays in production, the changes in workforce and any other new regulations in the wake of the pandemic affected your company’s financial results, both now and in the future?
This is serious stuff. Why? Because the people reading these financial statements have the power to grant, and take away, crucial financing that a company needs to survive.
So how can you report your numbers so that the reader of the financial statements – a bank, an investor, a government official – can see what the impact of the coronavirus had on your business? And in future years, how will you be able to show that the growth in your revenues and profitability is true growth and not just that you’re obviously making more than you did in a year when a global pandemic shut everything down.
Some companies – like Uber – are summarizing all of these costs and displaying them on a separate line below operating income and calling it “adjusted” Ebitda (earnings before income taxes, depreciation and amortization). But some experts believe that the move is just a short-term fix because who knows how long this impact will last and it may not be exactly right to push all of the bad news down to the bottom of the income statement and simply declare it as “extraordinary”.
Other companies, according to John Jenkins on TheCorporateCounsel.net blog are keeping their numbers as is, but adding descriptions, disclosures and reconciliations in order to provide better information to the financial statement reader. “That seems to me to be a better way to present this information than adjusting it away,” he wrote. “Formal adjustments that back out the pandemic’s effects are like asking, ‘Other than that, Mrs Lincoln, how did you enjoy the play?’”
Already, the big accounting firms are jumping into the debate. KPMG has a podcast that specifically addresses the issue, RSM has published – and regularly updates – a white paper addressing financial reporting impacted by the pandemic and Marcum warns that companies – big and small – with 31 December 2019 year ends and who haven’t finalized their financials (which is the case for many small and medium-sized firms, who usually get pushed back behind the needs of the larger, publicly held companies) may be looking at a significant subsequent event disclosure that may in some cases even call into question their organizations’ future viability.
No one really – not even the largest accounting firms – has all the answers. But one thing’s for sure: if you’re running a small business and you’re reliant on outside funding based on your financial results – or you (hopefully) just want a good set of reliable financial data to run your business – then it will be important to meet with your financial advisers and make some adjustments to the way you’re reporting operations this year, and perhaps for the next few years.
Coming up with a way to segregate the numbers showing the impact of the pandemic on your business this year will ensure that, in future years, when things are hopefully rosier, you and any outsiders can make apples-to-apples comparisons of the numbers you’re using to manage your company. Otherwise your ability to make decisions, and get critical financing, could be significantly impaired.
See? Not so bored any more are you?