BURNING CASH AND ITS RELEVANCE IN SMALL BUSINESSES

Between December 2019 and January 2020, the world economy was surprised by the COVID-19 pandemic, popularly known as Coronavirus. The speed of the spread of the virus, originating in the province of Wuhan - China, to other countries, left the world population in panic. This feeling of panic can be divided into two types: excessive concern about health and, the second type, in relation to the direction of the economy, either in the country itself (macroeconomy) or of small and large businesses (microeconomics). Several of these entrepreneurs, especially from large companies, are concerned about the future of their businesses and, consequently, losses of margins and profits. On the other hand, the base of the economy of any country, represented by small and medium-sized businesses, is concerned with their own survival. It is known up to this point that, as an emergency measure to contain the proliferation of the virus, most countries have declared a quarantine period, affecting many companies. As a consequence, these entrepreneurs need to deal correctly with the handling of the Cash Flow of their respective company, so that, at adverse moments like this, they have Reserve Cash and Liquidity to support Short and Medium-Term obligations, as explored in the Article CASH FLOW AS A DECISION-MAKING TOOL FOR THE UNCERTAINTIES OF COVID-19To better understand Cash Flow cycles and how it affects small businesses, especially in times of economic adversity, JPMorgan conducted a study to explore the financial lives of these small businesses in the USA. 470 million transactions carried out by 597,000 small businesses were used over a nine-month period. The result found in this research, to the concern of the small business class, was that half of these companies have sufficient Cash Reserve to support 27 days of operation without any additional revenue. In 25% of the companies analyzed, the average Cash Reserve is equal to or less than 13 days. The sectors with the lowest average are Restaurants (16 days), Maintenance (18 days), and Retail (19 days). On the other hand, the Real Estate Sector maintains an average of 47 days. The restaurant, among the various businesses analyzed, is the one with the highest average cash inflow and outflow, which shows the fragility of the sector when Recurring Revenue is negatively affected.

Source: JP MorganCompanies that operate at the cash reserve limit tend to have difficulty maintaining their operations in times of crisis such as the current one. To be able to get out of the Crisis, they need aggressive management focused on Cutting Costs and, if possible, Raising Resources. As today we are reaching the 20th day, since the beginning of the Pandemic and Lockdown in Brazil, it is likely that several entrepreneurs are already experiencing difficulties in keeping their businesses “operating”. Some have probably already started compulsory vacations, fundraising, or even layoffs. This perverse domino effect causes everyone to be affected in some way. In the USA, for example, more than 3.3 million people have already applied for unemployment insurance in the month of March, surpassing previous statistics in Department of Labor reports, published since 1967. Economists' projections point to a total of 4.4 million unemployed at the expense of this current crisis. In Brazil, we are approaching the 5th (fifth) business day, the day on which salaries are paid to employees. It is known, so far, that several companies are able to keep their obligations up to date, keeping the number of employees unchanged. However, it is possible that this date will change the entire scenario of the employee base in Brazil. In times of global crisis and economic paralysis for an indefinite period, it is the small companies that suffer the most, because they have the least access to credit and often because of the lack of adequate cash flow management. As a result, many companies leave the scene, filing for Judicial Recovery or Bankruptcy.Practical Example of a Restaurant in Belo Horizonte:An entrepreneur owns a well-known restaurant in the city where he lives, where he employs 50 employees, with a loyal and well-profitable clientele. Because of Lockdown, this restaurant is behind closed doors unable to bill a single order. In addition, taking into account the dynamics of the sector, it is reasonable to say that this entrepreneur has approximately 15 days of Cash Reserve (an amount close to the national average for the Restaurant segment). At this time, it is necessary for this entrepreneur to have enough cash to honor his obligations, including fixed expenses such as rent and employees who, due to the culture of the segment, often receive the “10%” in advance considering the Cash Reserve of this restaurant, It is reasonable to say that this entrepreneur will not have the resources to honor all their commitments after two weeks of Quarantine, especially the Payroll, directly impacting the lives of their employees. In addition to not receiving their salary (fixed or variable), they are also at risk of dismissal, due to the restaurant's lack of financial capacity. Furthermore, it is likely that this entrepreneur will not be able to pay all due severance charges and funds. This employee, who always liked his boss and worked in the restaurant, will only receive what is entitled to him in a few months, through the courts, and if, only if, his boss manages to recover the business or has personal assets to meet this commitment. This practical example is similar to what millions of companies, and consequently their employees, are experiencing during the last few weeks. It is a critical, very serious situation that is unlikely to be resolved without much dialogue and common sense on the part of businessmen and government officials. Apart from the manageable part of each entrepreneur, it is up to the State and Federal Governments to take palliative measures for the survival of SMEs, thus guaranteeing jobs for the population and, consequently, maintaining controlled crime and unemployment levels. Some fiscal, regulatory and tax measures are being adopted to alleviate the effects of the current crisis, as stated in the Article ORGANIZATION AND PLANNING IN PERIODS OF ECONOMIC INSTABILITY.It can be seen that all companies feel the economic slowdown, however, small and medium-sized companies, especially in the Food, Retail, Repair and Maintenance sectors, suffer even more because they do not have sufficient Cash Reserves. ARTICLE WRITTEN BY VICTOR CALHEIROS — ASSOCIATE OF FC PARTNERSGo to our site: http://www.fcpartners.com.br