Also there is the liability disincentive. If you have cash in the company, then it's an asset of the company that can be taken via lawsuit. If that cash is paid out to shareholders via dividends, then there is no company cash to be seized via lawsuits.
Silly question but I think a valid one. Do small businesses include contractors? In the UK contractors are required to form a Ltd, thus all incoming is also outgoing (tax, VAT, salary, dividend, expenses)
If that is the case, the $7 make sense. I only leave a small capital in my company £5-7k for expenses/surprises by HMRC (aka IRS).
>In the UK contractors are required to form a Ltd, thus all incoming is also outgoing (tax, VAT, salary, dividend, expenses)
I don't think they're required to do this.. certainly it's possible to work via a brolly. Public sector clients have started asking some contractors to do this post-IR35.
Whilst I know agencies have their own policies on this, do you know of any legal reason why companies wouldn't be able to work with contractors who are self-employed for tax purposes (/instead/ of operating via a Ltd company)?
Obviously in most circumstances it's a really dumb idea to operate as self-employed instead of via a Ltd company.
I've been contracting in the UK for "a while". The last couple of years the gov was pushing the IR35 agenda to increase HMRC revenue, making contractors "super expensive employees without benefits". This year majority of the calls I got were within IR35 (no more Ltd) or Umbrella.
Up until 2019 vast majority of calls/contracts offered to me (in the IT Audit/Risk/Security, GRC areas) were Ltd. I guess large Financial Services companies enjoy the 2mil liability insurance. Because if little-me messes up, their will get jack-shit :) It was also making the "contracting for a project and not an employee" scenario.
Uh, no. If the business is a corporation then it has stockholders, and if it's a small business (meaning probably not interested in being a high-growth company) then it's likely letting all of its earnings pass through to the owner(s) as salary and distributions.
All the more reason not to keep cash there. The way US corporate taxes work, if you keep cash year-to-year in the business itself, you get taxed on it - And then you get taxed again when you disburse it to yourself.
Remember this the next time you hear a talking head complaining that corporations pay zero taxes.
Taken as a unit or class of businesses that's true. But the individual picture... I think JPM has taken the median of outflows, and the median of inflows - not the median of margins.
I can't say from the report, but I wonder if business margins are partitioned into (a.) positive and above $7/day, and (b.) negative margins (for those businesses heading into the 9-12% of business exits per year).
On the other hand, the report also says that inflows and outflows are highly correlated, so the variance in margins away from $7/day must not be too high.
This is their increase in cash, not what they make. A mature business usually has a cash reserve, and all profit is paid out to the owner.
Example: Let's say you own a bakery. Rent is $3000 per month. You pay someone $3000 in salary, $3000 in utilities, and $3000 a month in ingredients. Your total sales are $24000 a month.
The reserves of the business are $20,000 which you consider to be sufficient. As the reserves are sufficient, you pay out all profits (12,000$ a month) to yourself.
Even though this business is very healthy and profitable, and can easily handle an economic downturn, cash inflow is equal to cash outflow.
I read it as the money left over after everyone, including the owner(s), has been paid. $7/day is the net new wealth generated by the business, so to speak.
If true, doesn't this obviously indicate widespread cheating on reported revenues? Maybe the problem here though is using the median as if it were meaningful.
Another explanation is that a large percentage of business lose money and they drag the median down.
Or it may just be that outflow here include salary or dividends to the owner. In which case there's nothing surprising about it.
Nope, remember a Microsoft counts as exactly one company the same as someones 2k/year side hustle. Further, both are to far from the median to have meaningful impact. So, it’s really just talking the long tail of companies not some sort of meaningful average.
The thing about the median businesses is it’s either a single specific business or the average of 2 very similar companies. In that context a single company making 140k/year and paying out 138k a year in expenses likely mostly as salary for it’s owner/operator is uninteresting.
The median, not the average. But it does seem to be saying 50% of small businesses make less than $7/day. Maybe this is after paying the owner a salary?
I've gotten several inquiries (more than in the past 10 years) on LinkedIN recently from 'investors' offering financing for companies 'in trouble'. I run a very small company that is completely bootstrapped and I have never used any outside funding for anything I've done. Yet, they found me.
Every small business owner in the US should check out the details of the CARES Act (the coronavirus rescue package, just signed into law).
Essentially, the US government will cover your payroll, rent, and a few other things for the next 2 months, up to $10M.
This is implemented as a “loan”, so that it can be rapidly issued from existing commercial banks - but the principal will be forgiven once you provide documentation that it was spent on covered expenses. You don’t have to pay it back.
It’s not perfect, but it might be just enough to bridge the gap for many businesses until things start returning to normal. Hopefully, Congress will extend it if necessary.
Do you have a link for this? The stuff on sba.gov doesn't mention the forgiveness portions of these loans anywhere I can find, so the only info I've seen is summaries provided by news media.
There are various covid-19 related programs on sba.gov, but none of them seem to exactly match how the news has described them, and I think one could easily apply for the wrong type of loan assuming it would be forgiven and end up on the hook for the full amount.
The thing to note is, if cash inflows stop, some cash outflows also stop.
Like if you're a store and you're not selling any products right now, you're also not buying any inventory. If you're a restaurant that's closed, you're not buying any food.
Revenue has to include cost of goods sold right, unless specifically excluded?
Assuming one made the right choices and is 100% cash, what now? Do you buy the dub on equities? In my view cash is also getting diluted by gov action, which can be nicely summed up by the meme money printer go brrrrr
You need only look at foreign currencies and the price of precious metals. The dollar is weakening. That means inflation or even hyperinflation if the dollar price index slips below 90.
> We constructed a sample of 597,000 businesses who hold Chase Business Banking deposit accounts and meet our criteria for small, core metropolitan operating businesses.
I read the overview — not the full 44pg pdf. But if small businesses manage their finances at all similarly to the way I as an individual do, I wouldn’t expect a single bank deposit account to hold the full story of all the liquidity a business can tap into in time of need.
For example, how many of theses businesses keep enough $ in the bank account to cover monthly expenses, and then keep some in a higher grossing money market account with a different institution which they can tap into in times of unexpected/less frequent demand, or as they save up a deposit on a nicer office, or as a way to optimize their take-home pay for tax purposes? I don’t know the answers, but from the overview it seems like Chase doesn’t either.
Is there an equivalent "short term disability" insurance for companies? Where if some unforeseen event happens, they can still make 60-80 percent of their revenue for 6-12 weeks?
You can get insurance on your receivables, which is the real immediate risk. Lost revenue is one thing, but right now a lot of companies are refusing to pay or changing payment terms and many will go bankrupt.
If you are owed $500k in the next 90 days from a company that’s going to default on its debt obligations there’s a good chance your receivables will fall apart long before revenue itself is actually a problem.
To anyone believing the hogwash about, “loans getting forgiven in 10 months if you follow the rules,” go look what happened with student loan forgiveness for public service.
Trusting anything the US government says about money that could cross a political cycle is just stupid.
I have never really thought about daily cash flows before, but it looks like for SMBs the cash inflow and outflow is the same on a daily basis. How do the owners make money?
That is a great insight. It is incredible how fragile the economic system is. This is one of the weak points if the economic system that can destroy decades of work.
Or robust depending on your point of view. The consequences for running out of cash are simply not that severe.
Let’s say you own a restaurant, your revenue goes to zero. You pay wages owed, then stop. Unemployment picks up a part of the loss for employees, their landlords feel the pain. Food goes bad, restaurant takes a loss on that. Rent doesn’t get paid, landlord foots the bill. Utilities go to nearly zero, etc.
By the time this is all over, we will see 3 things:
1) we will learn where safety nets did and didn’t work
2) landlords will have to lower rent to account for periodic lost income over the next 2 years or they will have to agree to self insure for losses during times of shutdowns.
3) we will have insights in to which countries have functioning healthcare systems and which don’t. Also which are efficient and not. Hopefully the globe can improve their policies.
Rent is determined by what businesses believe they can make in profit. If businesses believe they will be shut down periodically because of SIP orders, they will need a discount to today’s rent all else equal
Rent is determined by a fairly complex interplay between what landlords believe they could collect from some hypothetical tenants, and what tenants believe they could afford to pay based on some hypothetical level of business.
Granted, not many tenants will choose to pay rent that exceeds what they think they can pay, but it may certainly exceed what they are actually able to pay.
And plenty of landlords keep premises empty because they want to wait for some other tenant who will pay them what they think they can get, rather than accept the rate real potential tenants are prepared to pay.
If you mean that rents may find a new equilibrium at a lower price where the demand and supply curves cross that’s how markets usually clear. At least in textbooks. :-)
Tbh, it’s exactly what I mean. The important distinction is that nothing has changed except willingness to pay so... rents have to go down to clear transactions.
Overtime, some landlords will hold out, but by doing so, they may lose money vs what they would make if they sign lower deals.
Bingo. If a landlord owns 50 restaurant spaces that are fully occupied and one restaurant starts having financial problems, the landlord doesn’t care, he can let them close down and find a new tenant.
If all 50 restaurants start having problems, he now is going to be super motivated to figure out a way to help them all stay in business.
Yea but this not a permanent shock, it's a temporary disruption. As soon as this passes over, rents will likely revert back to where they were before.
In NYC there are many vacant commercial spaces because landlords hold out for the highest paying tenants. You're overestimating the desperation of landlords.
or rather the small business goes bust and in a few months, when people can finally come out, you have high streets full of closed shops and restaurants.
The official bankruptcy filing may take time, but many will cease operations immediately once cash reserves are exhausted. If liabilities aren’t significant, there might not even be a bankruptcy filing; they’ll just never hire workers back and the owners will file their last tax returns for the business next year.
The effects will take time to be felt; with the US stimulus bill (“CARES Act”) providing 10 months of unemployment, workers will be cushioned for now, but might not be able to find jobs when that relief expires.
You don't have to declare bankruptcy to shut down a small business - even with huge debt. You just dissolve the business entity and the debt goes down with the ship (unless you have a contract that says otherwise).
Most small businesses would be required to personally guarantee the debt (unless they were able to show a history of revenue to an amiable lender); owners will either cover out of their pocket to protect their credit reports, and only failing that, declare BK. Of course, walk away from the debt if you’re not personally guaranteeing it.
Leases will be broken and debt will be defaulted on at scale; it’s going to take years for everyone to fight over the scraps in court.
Rather than see this as pointing to how fragile the economic system is, I view it as how wrong the current zeitgeist around business practices (having money is lost opportunity) and which businesses truly are viable (businesses that run up years worth of debt chasing some remote possibility of an explosion of profit).
this is both a pro and a con. If companies could hold on indefinitely without running a sustainable model, then old companies would never die and disruption would be much harder. To analogize it to a HN audience, this would likely mean that Yahoo/AOL would still be the dominant search engines.
Structural changes aren't that easy to make, and often have unintended consequences. Glibly advocating for some immense change in the system can bring about severe ripples that are not so easily undone.
This isn't quite accurate, it shows more than 50 percent of US small businesses have less then a month of cash reserves on hand, around 25% only having 13 days.
I generalized (“TLDR”), as whether they have 13 days, 30 days, or 45 days matters little. Regardless, few businesses have enough cash reserves to survive this black swan event. When you’re dead, how dead you are isn’t terribly important (the COVID pandemic will drag on for months). Mea culpa for not making that more clear.
It's kind of surprising because personal finance experts are forever lecturing individuals to have 6-12 months of cash on hand as an emergency fund. Maybe different rules apply to a business because it can always just declare bankruptcy and restructure?
The difference is that businesses can acquire loans. That was why 2008 was so dire -- the musical chairs game of toxic subprime mortgage made it difficult for banks to lend money. For whatever reason, it's just far simpler for a certain class of small business to piggyback on the repo market, and when that seizes, so do they.
This time around the fed has been swatting anything that looks like a credit freeze, and there's no expected deficiencies in the banks themselves.
Just like lots of individuals aren’t able to have 6-12 months of cash on hand, many small businesses aren’t able. For a lot of restaurants, that might mean savings hundreds of thousands of dollars when a month’s profit might be $2000, so saving all your profits for a decade just to have an emergency fund. (Small restaurants aren’t a good way to make money generally)
Seems like maybe there are systemic issues with the economy...maybe concentrating wealth in the hands of so few doesn’t make for a robust economy that can handle some punches.
Let me illustrate with an example. A colleague operates a company doing about $10M in annual revenue. Due to stay at home orders, his business has completely failed. A very wealthy minority shareholder who lent the company some funding last year is now going to do a debtor-in-possession financing and will end up owning the whole thing. The founder, who is not wealthy, will lose everything. The rich man will gain everything.
Once the pandemic is over, the company will return to normal. The rich just got richer, folks.
>Once the pandemic is over, the company will return to normal.
I wouldn't say that. Your employees who did the work and had tribal knowledge are now gone. If they didn't document something, it may not be found for a good while.
Point is, it might take a lot of work to get it back going. Or it's as easy as putting some equipment on firesale and shredding everything else.
It seems like you are trying to portray the lenders as the bad guys here. If that’s the case there is one thing I don’t understand.
I had no money to fund my enterprise venture. Found someone that believed in it enough to lend me money with the promise I would pay it back. I couldn’t pay it back so they “took” my company.
How are the lenders the bad guys? What are they supposed to do?
As a society, we want your enterprise to exist and be owned by you, an individual, not a lending company. We need a different system that can fund you and keep you funded as long as it’s a good business, which means even through events like this one. I’m not sure exactly what that looks like, but it’s not our current system.
If it was easy, someone would have figured it by now, after hundreds of years of shareholder capitalism. At the end of the day, real world business is risky, and someone must be taking that risk. If lending companies are asked to both front the money and take the risk, there will be no lending companies and no financing.
People love to talk about how lenders take a risk by lending, and that's why contemporary "capitalism" tends to limit the distribution of profits back to lenders/shareholders.
But you take a risk simply by deciding to "invest" your labor in a venture too. And if the venture fails, in almost all cases, those who chose to provide labor instead of capital find themselves much worse off, practically speaking, than those who can spread their investments around and amortize risk.
It's not that the lenders are bad guys, it's that they are participants in a bad system that provides preferential treatment to capital versus labor.
But lenders take a different risk. They don't share in the upside. I can borrow $100m against assets for next to nothing. You can't raise the same amount of equity for next to nothing -- equity investors are generally looking for much higher returns, for the risk they are taking.
The interest rate is itself a reflection of the broader equity situation. The price of a loan right now is ... very low. It will go up and down, though I agree that it rarely matches expected equity returns.
The thing is, lenders are free to decide on terms, and whether to issue a loan at all. Part of their actuarial calculation must include some rate of default, because otherwise there would now downside to lending anyone anything. We may end up in an unprecedented time thanks to the virus and our policy decisions about it, but that's all part of the risk lenders take, and they (are supposed to) factor that into the rates they offer. I will bad for them, I suppose, if there is mass scale defaulting, but I see no reason to preference them over anybody else who makes the choice to participate in a loan-driven venture.
I see this as an inevitable consequence of the fact that most small business owners assign a large value to the intangible of "being your own boss" not to mention the potential for wealth, and this drives everyone to have no margin for downturns.
I mean, think about restaurants. Who starts a restaurant because they think it's the easiest way to make a dollar? The very fact that many people want to do something for reasons other than sheer profit means that profit will be driven below normal which will cause pain over time.
What can the rich do to prevent this? Unless they got together and eliminated the ability of the non-rich to seek wealth. Sometimes, that's the conclusion elites reach about things; they do it to some extent. Like the way in the US you have to be a "qualified investor" with a certain amount of assets to invest in unregulated securities.
> The very fact that many people want to do something for reasons other than sheer profit means that profit will be driven below normal which will cause pain over time.
Cash on hand is a lot more nuanced that profit vs not profit. Airlines spend tons of money on stock buybacks due to the drive for "profit" which hurt their cash on hand significantly.
Cash on hand is either: unclaimed profit, capital or loans (Accounts payable that isn't fulfilled). So while having more profit can make it easier to have cash on hand it isn't the only way.
> What can the rich do to prevent this?
I don't understand where this question came from. Are you talking about banks reducing the chance of bad debt due to insufficient liquidity? Are you talking about the rich trying to stop small businesses from increasing competition and reduce their profits?
> Like the way in the US you have to be a "qualified investor" with a certain amount of assets to invest in unregulated securities.
Unregulated securities are often a synonym for "scams" that is why you have to be a qualified investor.
> Unregulated securities are often a synonym for "scams" that is why you have to be a qualified investor.
That's the point though, scams are scams whether they're run by a loan shark or Bernie Madoff. Anyone should be allowed to invest their capital in any legitimate venture they see fit, and anything that meets the legal definition of a scam should be shut down and barred from taking money from anyone.
It's quite patronizing that the government takes the stance of "If you don't have X amount of money, you're not wise enough to tell the difference between a scam, a foolish business venture, and a legitimately risky business venture. Better leave that to the experts (and their commissions)."
When there's an endless supply of "marks", it means that you, as a hypothetical sensible and intelligent entrepreneur are faced with competing with them in good times, and then none of you can deal with the bad times.
Free markets can't fix the effects of collective error or stupidity through some magical means. They can reinforce it.
I agree with you, but I disagree that the solution for it is "You can only invest in these ventures if you have X net worth". Having more money does not necessarily imply one is less foolish, and it disqualifies those who are capable of properly evaluating an opportunity but are not high net worth individuals.
If you don’t operate a restaurant on lean margins, you won’t have any customers because your prices will be too high. The competitive market forces low margins and thus low capital overhead.
Yes, my point is the equilibrium gets lowered further if people are willing to accept lower profits or losses due to intangible reasons and/or commitment to sunk costs, self-image, etc. This is more characteristic of small businesses than large ones, of whom people always slam "bean counters".
Saying "the competitive market forces" is not a proof or an argument that competition has to produce the outcomes we see. If people were different, less willing to take risks, then there would be less pain in a crisis.
Does your colleague know that he can get up to a $10M loan from the Small Business Administration, and that any of the principal spent on payroll and rent will be forgiven?
This might be enough to keep him afloat until things start up again.
This isn’t always worth doing as they buyer typically can only dispose of the assets at fire sale prices.
This is why SV Bank’s collateral pledge always excludes the IP: they don’t know what to do with it while what’s left of the team has a better chance of selling it/getting aquihired.
That raises a good question: what proportion of small businesses (SBA definition or JPM's sample definition) have shareholders? Vs. being sole proprietorships or partnerships?
This is the core philosophy of capitalism: the one with more money wins. Otherwise why would people sacrifice other important things (health, time with family) for money?
The advance of modern technologies (agriculture, transportation) improves everyone’s life standards so we enjoyed quite some time feeling everything works fine. But now the tech advance slows down (largely due to the fact we haven’t had breakthroughs in fundamental physics) so we start to feel the old
pain again but really it’s been there for thousands years.
How does wealth concentration tie into the report's findings?
What I saw was that most of the small businesses in the JPM report are operating on margins of a few dollars a day. That might be the consequence of competition, driving down prices; or, maybe broadly high confidence in market stability -- whether reasonable or not -- lowering the level of caution small business owners thought they needed to take. But I'm not sure how it relates to wealth concentration.
As I see, it means small businesses are getting squeezed too, just like poorer individuals who also have small cash buffers. It's possible to interpret this as economic efficiency, but it is efficient in the same way communism is efficient, i.e. efficient at misallocating resources. Tight budgets are like tight rubber bands and if there's enough stress something will break. I think that's enough terrible analogies, you get the point.
People across the globe are watching how the distribution of wealth in each country relates to the economic effects of this.
There are a lot of confounding variables, some more related to wealth distribution (i.e. universal healthcare vs not), and some less related (timeliness of local authorities and government reaction).
At the individual household level in the US at least, household savings are very low among large segments of the population (because of high wealth disparity), so there is very little to fall back on for most people. Depending on the length and severity of the pandemic, the 2T relief/stimulus bill may not be enough.
Overall, this is a huge test for how whether the amount (or lack) of slack in important areas of the system - primarily income and health care, but others too - can cope with this shock.
yes, slack in the economy (in forms like cash reserves and inventory) provides robustness and resiliency, but our financial sector has mined it for the benefit of the wealthy and to the detriment of the rest of us. it's yet another reason to revise policy to move us (back?) toward a better balance.
for instance, we need to allow all kinds of businesses to (live and) die, and also provide a robust safety net so people can try ideas big and small without being left destitute upon failure. then they can pick themselves up and try again. capital then flows to find the best ideas because we're allowed to try more of them. instead we get stupid capital gains & inheritance tax rates that mainly benefit the already wealthy and blunt capital's edge.
Unless they're stuffing their wealth in mattresses that wealth is spread everywhere in economy. Also a lot of that wealth is based on market value of assets which ebb and flow and inflate and crash. It is not based on sucking cash out of the economy.
Put another way, the economy is fucked but a small % are able to inflate the market value of their assets.
This isn’t “some punches”, this is one of the biggest pandemics in living memory and will be an event whose consequences will be felt for the years and decades to come.
I’m not disagreeing with wealth concentration being problematic, to be clear.
Someone help me understand. Does this mean that small businesses make $7/day or $2555/year on average?