Surviving Lockdown: Cash Is King

In the third episode of the Founderssauce Podcast, Mash & I talked about how cash is king in this new reality. Most of my talking points were taken from a report by the US bank JP Morgan from 2015. This report was constructed by means of a survey of over 600 000 of their small business clients across 12 industries. This may have no relevance to the South African market but the general takeaways should are quite jarring  

 

The four findings were as follow:

 

  1. The median small business has average daily cash outflows of $374 ~(R6300)  and average daily cash inflows of $381 (R6400), with wide variation across and within industries. 
  2. The median small business holds an average daily cash balance of $12,100 ~(R205 100), with wide variation across and within industries. 
  3. The median small business holds 27 cash buffer days in reserve. 
  4. Small businesses in labour-intensive or low-wage industries hold fewer cash buffer days than those in capital-intensive or high-wage industries.

 

Finding 1: Cash in vs Cash out

 

Most small businesses have nearly equal daily inflows and outflows.  Meaning limited cash on hand.

 

“Individual small business average daily inflows and outflows are highly correlated. Average daily cash inflows and outflows vary widely by industry” 

 

Personal services have a very small margin on what they make on a daily basis, on top of making the least amount of money on a daily basis. But the general census that should be taken away is that small business is really stretched for cash on a daily basis, no matter the industry things are tough.  

 

This is the reality of small businesses, it is tough and things become compounded when they are not allowed to make money when revenue goes to zero majority of them will not open for business.  

 

Finding 2: Average cash balance on hand

 

This one is the most skewed to the US on an absolute basis. But I want you to look at it on a relatively, of what these amounts actually mean compared to each other. Personal services again hold the least amount of money at any given time. I don’t think we defined what personal services actually is, this is not to be confused with professional services (accountants, doctors, lawyers etc), personal services are your hairdresser and barber, your barber cannot afford to close for 21 days, this lockdown will be a financial catastrophe to them, so is your repair and maintenance industry and retail. It should go without saying that High-Tech manufacturing has the most about of money at hand given that it is a capital intensive industry.

Finding 3: Cash buffer days 

 

I think this is the most important finding of the report. On average small business has 27 days of cash on hand. I find that Incredibly stressful. It doesn’t stop there, the situation becomes dire when you know that 25% have less than 13 days of cash. The industry with the least amount of cash on hand would be your restaurants with 16 days on average, with supply chains, staff and rental costs that they need to pay on a daily, weekly & monthly basis, one can understand this. This is followed by your repair and maintenance industry, then retail then construction then personal services, all have 21 days or less of a cash buffer. Well damn, is all I can say. 

 

 

Finding 4: Labour-intensive vs capital intensive 

 

This is an interesting one, Small businesses in industries with a high amount of information technology or intellectual property (IT/IP) do not hold cash buffer days that are very different from low IT/IP industry businesses. Similarly, small businesses in business-to-business (B2B) industries do not hold cash buffer days that are very different from business-to-consumer (B2C) industry businesses. But Small businesses in labour-intensive or low-wage industries hold fewer cash buffer days than those in capital-intensive or high-wage industries.

Thanks for reading, I apologize for not having solutions.

 

Please find the full report here: https://www.jpmorganchase.com/corporate/institute/document/jpmc-institute-small-business-report.pdf

 

Cheers,

By Ububele Kopo

 

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