Small businesses get things done. That’s why they are so frustrated at the government, even though they are supposedly moving rapidly and are “ahead” of schedule.
The clear news on the ground is that with little cash on hand, few receivables, and no current business, they are frozen. Most must hold on to what cash they have, so can’t pay their vendors and landlords. Many have paid what they can to employees, but if they have high labor component; retail, restaurants, beauty shops, and service companies, they ran out of money in just two weeks.
The reason is simple. Take a small restaurant their labor is about one third, their food cost is about the same, and rent and other costs take nearly a third, leaving from 5% to 15% to the owner (or profit). It would be nice to think that that say 10% is just going into the bank, but the owner has his own personal expenses; house payment, food, kids costs etc. So the cash accumulation in the business (even if it is a profitable one such as this example) is just a few percent per year.
So after two years a million dollar restaurant might save $100,000. Sounds like a nice nest egg, but with a payroll of $330,000 per year, $27,500 per month, and other costs of about $20,000 the total nearing $50,000 per month, will be wiped out completely in just two months. (Food costs stopped with only a week or so on hand when he closed.)
The example above assumes a nice sales volume and a well run operation. Few can boast of such success.
The President’s stated goal was to use the PPP to get money in the hands of employees. This will be done but based on the example above it could be woefully short for many. As this drags on, landlords will what their money too, even if they stretch out the payments. Restaurants that start up again with less revenue than they had, may well operate at a net loss. The expense obligations and continuing losses after opening could amount to several year’s earnings in the best year let alone marginalized profits for six to eighteen months.
Under these circumstances, smart owners will have to weigh the cost/benefit of starting up again. Some may be better off to walk away. Many will have to because they have had mediocre businesses for years anyway, and risk putting a ball and chain on their ankle for many years.
I don’t blame the federal government for this heroic effort to maintain employee wages. It is a noble one, but if enough money is not made available in grants, many will simply have no choice but to close for good.
I have been accused by some business consulting peers over the years, that I see the glass half empty. I like to refrain, I see the glass as it is, not as I want it to be. After decades of working inside small business both as an owner and a consultant, what I see now is neither half full or half empty, it just scary as hell.
By The Numbers Notes
$ 333,000 Wages
$ 333,000 Food cost
$ 200,000 Rent and other expenses
$ 866,000 Total Costs
$ 134, 000 Gross Profit
$ 90,000 Living expenses and taxes
$ 44,000 Cash left to save or invest in the business