Ever wonder how that shop stays in business? You’re right to wonder.
(This post originally appeared on The Washington Post)
You know that little boutique around the corner that never seems to have any customers? Or the frozen yogurt store that sits lonely in February? Or the little café that seems empty most of the time? C’mon, you probably think to yourself: How do these places stay in business? How many dresses/vanilla cones/cups of coffee do they have to sell just to make the rent, let alone cover overhead and…oh…turn a profit?
Well, wonder no more. Your question has been answered. And unfortunately the answer isn’t good. Those small businesses are barely staying in business. That fact was confirmed in a new study by the JPMorgan Chase Institute, according to this report from Bloomberg.
“Most small businesses are operating on very small margins,” Diana Farrell, chief executive of the JPMorgan Chase Institute, told Bloomberg.
The study analyzed 470 million transactions by 570,000 small businesses last year and here’s the result: The average small business has about 27 days of cash reserves on hand. Restaurants are in the worst shape, with only 16 days of cash. Firms in the real estate sector fared better with 47 days of cash. Many financial experts I speak to say a company should have at least six months of cash in reserve in case things turn south, which means that the study’s numbers aren’t good.
More disturbingly, the bank found that cash inflows for the typical small business exceeded its outflows by an average $7 per day. No, that is not a typo. Before anyone panics, outflows do include any transfers made to the owners for savings or (more likely) spending. Regardless, not a lot is left over in the business to cover anything unexpected.
Is it the economy? The political environment? Too much taxation? Over-regulation? Lots of groups and pundits point fingers. Or it could be that many of us just aren’t great business people. In the end, and speaking as a business owner, it comes down to the individual entrepreneur’s ability to turn a cash profit…and not just $7 a day.