One thing that is top of mind for our customers during the pandemic is budgeting and cash flow. Considering that earned revenues have largely been reduced and the Canada Emergency Wage Subsidy (CEWS) has been a major stabilizing factor during unstable times, projecting CEWS has become a priority for many.

However, due to the ever-changing nature of the subsidy, as well as the estimation involved in the calculation and forecasting process, attempting to project CEWS is a much more difficult task than most would assume.

Here is some further detail to help you understand how challenging it is to forecast CEWS, and what your alternatives are when trying to project budget and cash flow.

Estimating Future Revenues

There are 2 steps to calculating CEWS. The first is to compare the current period’s revenues to a previous period to measure the revenue drop. This is where the first element of uncertainty lies. It is very difficult to forecast revenues with confidence. We don’t know what public health challenges lie ahead, so many organizations are struggling around programming decisions, what to charge for vs. offer for free, and what fundraising avenues to pursue.

Nonetheless, your bookkeeper needs your revenue estimates by month before they can make any further calculations.

If you are accustomed to budgeting annually, you will need to pivot to a monthly budgeting process in order to generate estimates for CEWS.

Your bookkeeper will have evaluated the benefits of using the cash or the accrual method of reporting. If your company is filing using the cash method, your bookkeeper may need an up to date monthly cash flow forecast.

The Sliding Scale Factor

The second step is to calculate the subsidy rate. This tip sheet contains details on the base and top-up rates for Periods 8 to 10.

Since the base subsidy rate is calculated on a sliding scale, any errors from step 1 will be multiplied by a factor of 0.8 for Periods 8 to 10.

Additionally, if you have a greater than 50% revenue drop, a faulty revenue forecast will result in an inaccurate top-up subsidy estimate.

Estimating Future Payroll Costs

The second step to calculating your CEWS subsidy is to apply the rates to your payroll cost. Your bookkeeper will need your staffing costs by employee, by month in order to make the calculations. Employee detail is required because there is a maximum per employee.

Remember to allow for any anticipated changes — and any contingencies that should be discussed. For example, if you are considering a layoff under certain circumstances, your payroll will be reduced and your CEWS forecast needs to be reduced accordingly.

Government Policy

The government reserves the right to amend CEWS. We have seen a number of important changes to the program since it was first announced. We have also seen the rules confirmed very close to the implementation date. For instance, CEWS Period 8 arrangements were confirmed a few weeks after the Period start date.

The government has announced that CEWS will continue until June of 2021, but at this point we know the terms and conditions only until Period 10, which ends on December 19.

Risks

As you can see, there is a significant risk of inaccuracy in forecasting CEWS. The numbers involved are large. For many organizations, payroll is the single largest expense — and de facto CEWS has become one of the largest revenue sources.

Understandably, managers want to build CEWS into their budgets. For many organizations, CEWS has proven to be the single most stabilizing factor during the pandemic.

But, as you can see, a budget forecast for CEWS involves estimates on top of estimates — plus the “unknown” of future public policy changes.

Possible Approaches

The more conservative your estimates, the less likelihood you will wind up in trouble.

One important challenge with budgeting — in any situation — is that once the plan is on paper, people tend to feel “authorized” to proceed. This can mean that staff members forge ahead with planned expenses (which are in your control) while revenues (which are generally not in your control) remain uncertain.

One idea is to omit CEWS altogether. Define what revenues you’re able to count on, and what expenses you expect before even taking CEWS into account. This will give you a better idea of the state of your organization and your internal cash flow.

Or, omit the top-up subsidy and prepare your budget forecast only on the base rate.

If you are dependent on CEWS and therefore need to see it in the budget, prepare the best possible documentation for your revenue forecasts. Keep good notes! Review often. As each month elapses, re-evaluate your estimates for upcoming months.

Lowball revenue forecasts, which will lowball the CEWS rate that you may claim. Highball expense forecasts, including salaries — but hold back as much as possible on actual spending.

How Young Associates can assist

A consultation with us may make all the difference to your comfort level and confidence that your accounting system is up to the challenge of the pandemic.

We’d also be happy to give you a quote for full-service bookkeeping.

We work on the basis of fixed price agreements, so you’ll know going in how much our work will cost — and we always offer a money-back guarantee: if you’re not completely delighted with our service, we will, at your option, either refund the price, or accept a portion of said price that reflects your level of satisfaction.

This tip sheet was created by the Young Associates team based on the best information available to us as of the date of posting.

Although every effort has been made to provide complete and accurate information, Young Associates makes no warranties, express or implied, or representations as to the accuracy of content in this tip sheet. Young Associates assumes no liability or responsibility for any error or omissions in the information contained in the tip sheet.

Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, with a focus on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005, 2020), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.

Budgeting with CEWS