Business & Finance

How to Avoid Budget Hazards For Better Financial Future

How to Avoid Budget Hazards For Better Financial Future
Photo: Canva

COVID-19 seemingly appeared out of nowhere and continues to have a rippling effect on the global economy a year after it ravaged through the country. Increased unemployment and financial uncertainty have made it difficult for businesses and individuals to pave the way for a better financial future. Now, we will focus on the economic effect of COVID-19 and what you can do to protect the financial health of your business.

COVID-19 and U.S. Economy: Impacts and Effects

COVID-19 has devastated the economy in the United States, as well as many others around the globe. Shutdowns caused many businesses to stop operating completely, and job loss was widespread during the first few months of the pandemic. According to the U.S. Census, the employment-to-population ratio was expected to be 61.3% in April 2020 before the pandemic was considered, but it was only 51.5% once the pandemic’s effect was realized.

An economic crisis followed the COVID-19 public health crisis, leading to the hospital system being pushed beyond the brink and a global economic slowdown. Social distancing and lockdown measures were effective in slowing down some of the spread of the virus, but these measures helped lead to a severe economic downturn. The National Bureau of Economic Research determined that a peak in monthly economic activity had occurred in the U.S. economy in February 20020, but this came crashing down in the wake of COVID-19, disrupting 128 months of economic expansion in the United States. COVID-19 also erased 113 straight months of job growth.

Certain populations were more significantly affected by the economic crisis, including women, non-White people, and those who lived or worked in densely populated areas. Spending also declined.

COVID-19 has had a significant impact on certain industries, such as leisure and hospitality. Those cities that thrive on tourist dollars have suffered the most. Brookings Institution, a nonprofit public policy organization based in Washington, D.C., has found that Las Vegas and Orlando, two cities whose economies are primarily based on tourism, had among the top 10% highest employment declines of all metropolitan areas from November 2019 to November 2020. The Brookings Institute also reports that Las Vegas’ unemployment rate increased by almost 8% from November 2019 to November 2020, nearly 5% greater than the national increase. It had the 4th highest unemployment of all metropolitan areas.

Leisure and hospitality workers continue to confront the highest pandemic-related unemployment rate with more than 16% of these workers currently unemployed. The $100 billion a year U.S. conference industry has rapidly slowed down. Only 47% of Las Vegas hotel rooms were booked in November 2020, compared to 88% in November 2019. 44% fewer flights were serviced at Orlando’s airport in October 2020 compared to the number a year before.

4 Financial Money Moves to Make to Pandemic-Proof Your Business

COVID-19 has had a dramatic impact on the economy, resulting in an estimated additional 200,000 small business closings. If you want to help keep your business afloat, here are some financial money moves to make it through this unprecedented time:

1. Create a Business Emergency Fund

If COVID-19 has taught us anything, it is that we must learn to plan for the unexpected. Many businesses have had to shutter because they did not have the financial security to weather a global pandemic. While three to six months’ worth of expenses might be a good start for individuals, we recommend stashing five to twelve months’ worth of expenses if you own your own business. You might need to save even more if you think it would be difficult to adapt your business or pay for high expenses if you have a sudden decline in sales.

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2. Have Good (Business) Credit

If you wind up having to take out a business loan or credit card, doing so will be so much easier and cheaper if you have a good credit score for your business.

Maintaining good credit for your business is similar to maintaining good credit for yourself:

  • Pay your bills on time
  • Take out credit and use it responsibly
  • Diversify the types of credit you use
  • Monitor your credit

You will want to review your business credit report with one of the three major business credit bureaus: Experian, Equifax, and Dun & Bradstreet.

3. Maximize Your Retirement Savings

Some retirement savings advice is the following: maxing out your 401(k) contributions (or at least to your employer’s match). But are you adding that extra $6,500 in catch-up contributions, saving another $6,000 or $7,000 each year in an IRA, taking full advantage of all of your retirement options, and contributing to a 401(k) and IRA while also knowing you’ll be getting a pension, and checking with your employer if they offer a 503(b) plan or have recently increased their matching contribution? Also, carefully consider whether the tax treatment of a traditional or Roth IRA would be better for.

Financial security is an achievable goal, but it requires deliberate steps. Choosing to maximize your retirement savings requires you to investigate all available options, consider the cost and tax savings of each, and follow a plan to redirect as much money as possible. As a business owner, you have additional options available to you that are worth considering like SEP IRAs.

4. Don’t Take Out Required Minimum Distributions in 2021

With a potential 50% penalty, not taking your required minimum distributions (RMDs) can be a huge mistake.  However, there are some special rules that apply to the year 2021 because of the SECURE Act and CARES Act. The SECURE Act changed the age when RMDs became necessary from 70 ½ to 72 so that people who turned 72 in 2020 would be required to take RMDs in 2020. However, the CARES Act allowed people to skip RMDs in 2020. Even if you turn 72 in 2021 or turn 72 in 2020, you will not have to take RMDs until April 15, 2022.  

Bankruptcy During COVID-19 Statistics and Facts

Despite the devastating effects of the economic crisis, bankruptcy filings are actually down. The United States Courts system has reported that bankruptcy filings by the end of 2020 were down by 29.7%, compared to the number of bankruptcies filed by the end of 2019.

In 2020, there were 544,463 annual bankruptcy filings, compared to 774,940 filings in 2019, according to statistics from the Administrative Office of the U.S. Courts. This makes the number of filings the lowest it has been since 1986.

Court closures and economic relief targeted to small businesses likely contributed to the lower number of filings.

Chapter 11 bankruptcies are the only type of bankruptcy that has shown an increase since 2019. The number of Chapter 11 bankruptcies, in which a plan for reorganization is negotiated, was between 15% and 50% higher than in the same month in 2019.

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Is the Pandemic Causing More Personal Bankruptcy Filings?

So far, it does not appear that the pandemic is causing more personal bankruptcy filings. However, bankruptcy filings tend to lag behind other economic indicators.  One in five households was behind in rent as of July 2020. The Federal Reserve Board reports that households are 2.5 times more likely to file for bankruptcy in the year following a job loss, so the potential number of personal bankruptcies may soon increase. Additionally, medical bills are a leading cause of personal bankruptcies, which may be particularly significant due to COVID-19.

How to File Bankruptcy During the COVID-19 Outbreak?

After the pandemic took root in the United States, the court system was significantly affected with many negotiation meetings canceled and court proceedings delayed. Now, courts have largely resumed business as usual, so you can still file bankruptcy through normal channels, such as hiring a bankruptcy lawyer. Some of the court proceedings may be completed via telephonic means or electronic filing, but most courts are currently accepting new petitions. However, there may be a delay due to the backlog of cases that accrued during the early months of the pandemic.

Small Business Bankruptcy During the Pandemic

Small business revenue has decreased 20% since January 2020. A Harvard Business School paper reports that 74% of small businesses reported lost revenues between April 26 and May 2, 2020, but that strong policy response, increased uncertainty, and challenges assessing the bankruptcy system might delay or prevent bankruptcy filings.

Chapter 13, Chapter 11, and Chapter 7: Which One Is Better?

Each type of bankruptcy involves different eligibility criteria and a unique outcome, so which one is better depends on your particular situation and what you are hoping to accomplish. The United States Bankruptcy Court of the Northern District of California explains the various types of bankruptcies:

  • Chapter 7: This form of bankruptcy is available to individuals, partnerships, or corporations that are unable to repair their financial situation and who pass an economic means test. The debtor’s bankruptcy estate is liquidated, and proceeds are used to pay off as much debt as possible. Remaining eligible debts are discharged.
  • Chapter 11: This type of bankruptcy is available to corporations, partnerships, and some individuals that reorganize their debt through a repayment plan approved by the court. 
  • Chapter 13: Individuals who have sufficient income to repay most of their debts over a three- to five-year repayment plan may elect this form of bankruptcy.

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Understanding the economic effect of the COVID-19 crisis can help to better position yourself. There is still much uncertainty surrounding the long-term economic impact of the pandemic. However, by being aware of the programs available to assist your small business and the bankruptcy relief that may be available to you in case things turn for the worse can help you make the most informed decisions about the financial future of your business. 

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