How to Help Your Clients Survive Coronavirus-Caused Cash Flow Problems
COVID-19 has disrupted the lives of Americans across the nation. Today, many people are facing a cash flow crisis. As their accountant, you are perfectly placed to offer valuable advice that can help them get through the pandemic.
40% of Americans can’t cover a $400 emergency expense. That May 2018 CNN story made the point despite the health of the economy; many Americans were still struggling. Then came the Coronavirus, closing nonessential businesses and instructing many Americans to shelter in place. Today, many people are facing a cash flow crisis in their personal lives. Hopefully, they turn to their accountants for advice.
How Big a Problem Does Your Client Have?
If you provide financial planning, you’ve likely told clients they should maintain a cash reserve sufficient to cover six months of household expenses. Let’s assume no one has followed that advice.
There are several possible scenarios your client is dealing with right now:
- Full Salary: Your client is working from home, collecting their full salary.
- Small Salary, No Commissions: Your client works in sales, paid on salary and commission. There are no sales right now.
- Contract/Gig Economy Workers: They have work when they can find it or when the phone rings. Neither is happening. They run a business with no business.
- Furloughed: Your client cooks or serves food. Restaurants are closed. Your client is home until their place of business reopens. They might be collecting unemployment.
- Laid Off: The economy slowed. Their employer immediately cut the workforce. They are without a job. They can collect unemployment.
How to Reduce Current Expenses
Let’s talk about clients who are dual-income families. Here’s some advice you can share:
- What Bills Must Be Paid? Your individual client should develop a realistic budget to keep a roof over their heads, the family fed and the lights on. This current situation shouldn’t be considered a bad dream, and they should be reminded it will end soon.
- Don’t Eliminate Retirement Plan Contributions: Everyone who is still working should continue making retirement plan contributions. Stocks are a lot cheaper than they were in early February.
- Don’t Skip Bills: It’s tempting to plan on skipping rent or mortgage payments. They are big bills. However, nonpayment can lead to larger problems, like eviction. Skipping credit card payments can move you into a delinquent category with much higher penalty interest rates. Your credit rating will suffer.
- Reduce Discretionary Spending: Charitable contributions might seem like an easy expense to eliminate. Everyone is going through tough times. You might temporarily reduce the amount you give, but don’t eliminate it entirely. You can step back up when times get better.
- Negotiate with Your Service Providers: Shop around for a better wireless plan. Reprice your auto and homeowner insurance. You may not need to change providers. Telling your phone company you found a lower rate might prompt them to match it. They don’t want to lose you.
Where to Find Money
Cutting expenses doesn’t help much if there isn’t money coming into your bank account. Here's where your clients can look for extra money if they need it (as well as accounts they absolutely shouldn't touch):
- Retirement Savings: This is a tempting source that should be kept intact, except as a last resort. It’s likely invested in the stock market, which also means it’s likely taken a hit. Generally speaking, there are substantial penalties for early withdrawal. Leave this alone.
- Tax Refund: You might have one coming. Get your taxes filed as quickly as possible to get this process moving.
- Home Equity Line of Credit (HELOC): Many clients have them. Interest rates are at historic lows. This can be a short-term borrowing source, bearing in mind the money needs to be paid back.
- Securities-Based Lending: You have a stock portfolio. It may be the wrong time to be selling, but you can still borrow through your broker, using some of your securities as collateral. Borrowing “on margin” has been around for years. Bear in mind, when the market declines, the pain is felt on your side of the equation. There will be interest charges too.
- Insurance Policy Cash Value: It’s easy to forget whole life insurance builds cash value, as do annuities. These often have features allowing borrowing or withdrawals. The object is to keep the policy in force while accessing some of the cash value.
- Drawing Social Security: In many cases, “full retirement” is assumed to be age 66 or thereabouts, depending on when you were born. Many people can start accessing benefits after age 62. If you are at an age when future full-time employment looks unlikely, it’s an option to consider. The earlier you draw, the less you collect in benefits.
- Other Family Members: They may be in a better position to help relatives in need. It can be embarrassing asking your parents for help, but it could be the best option. They may be financially comfortable and agreeable to lending money. The loan must be properly documented. It’s not like collecting your allowance. If you died suddenly, there needs to be a record money is owed to other parties.
No one wants to be in this difficult position. It’s easy to make the wrong decision and pay for it afterwards. As an accountant, you can help your client through this tough time.
Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.