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
April 14, 2020
As the President assembles a large advisory group to determine how to get the economy going again, the simplicity of the answer is astounding. With all its critics, one thing businesses know how to do is work! Just tell them what the safety regulations are and leave it to them!
No, this is not just a quip. I’m serious. After working with small businesses for well over three decades, with all their problems, one thing they know how to do is work hard.
They already know how to start things, re-start things, hire, solve problems, and create products and services for customers. Mr. President, you and your task force don’t need to do anything but provide money. They will do the rest themselves almost intuitively.
The concept is not new. Adam Smith called it the invisible hand. He described the natural economy of business owners and tradesmen to automatically do what it takes to create products and trade. His book “The Theory of Moral Sentiments,” written way back in 1759, was more of a discovery than a contrived principle. People act in their own and their community’s self-interest. When customers’ needs are met, the businessperson serves the needs and wants of the customer, and serves his own desire to keep a few shekels for investment in the next day. This principle of social economics is based on human behavior and is innate in all successful businesspeople.
So, getting back to work is like riding a bicycle. Once you learn, you can get back on and ride again and again. Let them do it!
Sure, some phasing or restrictions will need to be thought through. But the consideration on the restrictions is all science and probability. We may need to restrict gatherings for a while longer. We may need to wear masks. We may need to take and record our temperature twice a day. Whatever science thinks.
So, determine the distancing guidelines, mask wearing, temperature testing, touching guidelines, and let each business figure out how to implement it just as they do for other safety issues. They already know how to comply with OSHA. If we can deal with OCHA, we can deal with Covid rules.
After all, each business owner must determine if they can make a profit based on the rules imposed on them. Then they will try to innovate to meet the rules. We will have millions of instant innovators on all these fronts once we know what the rules are.
This approach makes so much more sense than getting a commission together to figure out how to restart business. If a commission is such a good idea, let’s have one on how to ride a bicycle too!
Give us the rules and let us decide. It is the power and magic of our free enterprise system. Mr. President, you have done a good job thinking of business during the shutdown, but let us run our businesses, as we know how to do it better than you could ever do from Washington.