June 3, 2020

How Will A PPP Loan Impact My Cash Flow?

In a time when many business owners are working long hours to navigate potential financial crisis and keep their cash flow positive, the Paycheck Protection Program (PPP) can offer a much-needed lifeline. 

The PPP originated from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It’s intended to provide small businesses with eight weeks of cash flow assistance. These loans have a maturity rate of two years and an interest rate of 1% and can be forgiven under the right circumstances.

This is a complex program, but preparing effective PPP loan financial forecasts can help you ensure you’re spending your loan wisely and preparing yourself for the forgiveness process.

How To Use Financial Forecasts To Plan For PPP Loan Forgiveness

Using PPP Loan Financial Forecasts To Understand Cash Flow

Financial forecasting is always crucial to the health of your business, and this is doubly true if you have received a PPP loan. The first step to ensuring you’re spending your PPP loan wisely is to sit down and forecast the impact COVID-19 will have on your business through the end of the year. Preparing accurate and thorough financial forecasts will help you create a plan to guide your business through this crisis and towards positive cash flow.

In your financial forecasting, focus on the following:

  • Projected profit and loss statements
  • A projected cash flow statement

In your PPP loan financial forecasts, ask yourself what your situation will look like in eight weeks or more. Will sales recover? How can your business better pivot to adjust to the situation? (For example, many are already offering curbside pickup and delivery.)

Evaluate these forecasts to learn how the PPP loan can help your cash flow, and how your PPP loan can be spent to ensure you’ll have as much of your loan forgiven as possible.

Planning For PPP Loan Forgiveness

As stated above, the PPP provides eight weeks of cash flow assistance to your small business. This loan is forgivable, which can be a tremendous help if you’re prepared to take advantage of it.

In order to qualify for PPP forgiveness, your use of the loan must meet some basic criteria. These include:

  • 75% of the loan must go to payroll costs. The other 25% can go to expenses such as rent.
  • These expenses must be incurred over the course of eight weeks from the day the first payment was made by your lender. 
  • You must maintain the number of employees on your payroll. (There are some exceptions to this, including voluntary resignation and termination with cause.)

The financial forecasts you’ve created will help you analyze which of your expenditures will be forgivable. In evaluating your cash flow and determining how your loan can best be used, spend only what you need to spend, and be sure to carefully document everything.  

Potential Pitfalls Of The PPP

One major pitfall of the PPP is the mistaken assumption that you need to spend the entire amount to have as much of it as possible forgiven. This can lead to cases where less than 75% of the amount has been spent on payroll, or it was spent in a way that makes those expenses ineligible for forgiveness, and thus expenses that you were expecting to be forgiven are suddenly not covered.

Working with a financial team to ensure that you are adhering to the guidelines set out by the loan is the best way to ensure you’re avoiding any misunderstandings. 

Navigate This Complex Process With Junction Peak

Junction Peak can work with you to ensure you are adequately prepared to take full advantage of the PPP while avoiding any potential pitfalls. We can work with you to create detailed financial forecasts and navigate the forgiveness process, starting with an analysis of your current cash flow.

Get in touch with your financial team at Justin Peak to evaluate your current standing. We can help you navigate these choppy waters with a comprehensive process based on forward-thinking financial models. We’ll meet with you monthly to track your progress, so you’re never caught by surprise by your PPP loan application & forgiveness process. Work with Junction Peak’s finance team.

About us

Junction Peak is your finance and leadership consulting team. We use accurate financial forecasts and proven tools to help you grow. 

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  • info@junctionpeak.com

  • 3721 Douglas Boulevard
    Roseville, CA 95661