Why don't businesses have emergency funds?

[rennigade]

Ask TexasHusker. He has no EF and rolls all capital back into his businesses for growth. How's he doing now?

Not sure if you can filter posts by user...but look at his last 30 posts compared to him posting 3 months ago. He was insanely stressed. The financial impact was hitting him hard. This will be a wake up call to him and others in his position. You need reserves on hand.

Owning rentals does not magically produce money from the sky. People that own rentals think its the cats meow. This is yet another example that rentals arent the end all be all. You need to have a diversified portfolio, period!

[Singuy]

Not sure if you can filter posts by user...but look at his last 30 posts compared to him posting 3 months ago. He was insanely stressed. The financial impact was hitting him hard. This will be a wake up call to him and others in his position. You need reserves on hand.

Owning rentals does not magically produce money from the sky. People that own rentals think its the cats meow. This is yet another example that rentals arent the end all be all. You need to have a diversified portfolio, period!

Technically his rentals went from passive income to way more active after he decided to dip into commercial real estate like hair salons. You can't diversify active income. That's like telling people who got laid off they should of had two jobs to minimize the risk.

[disneysteve]

I'm assuming she's referring to small business.

And the reason is the small business is connected to the owner's personal finances, and the profit represents their income. The owner has their own personal expenses and savings to contend with. So when a business faces trouble, the owner needs to immediately dip into their pockets because the business finances represents their own. And depending on the financial success/stability of the owner, the business may or may not be able to survive a protracted downturn.

For example, I have a small sole proprietorship business. Any income (pretty much) passes through directly to my pockets. Any losses directly hits my wallet. Do you think I'm going to take hit after hit of losses if I can walk away from it? The fact that I have additional financial resources and ability to borrow money doesn't mean that a smart choice to make, especially in such a severe downturn that's WORSE than other recession because youre not going from 100% income to 90, then to 80. You're pretty much hitting full brakes and going to 0. If you're a restaurant or other business and you have the opportunity to walk away from that situation quick, only a fool wouldn't do so.

So if you own a business and COVID resulted in having to close it for 6-8 weeks, you just walk away? Then what? Do you declare bankruptcy and then turn around and open a new business? If that business provides your livelihood, you can't just walk away and be done. You need something to generate income. Doesn't it make more sense to use your emergency fund (assuming you have one) to get you through the emergency and then rebuild once you're able to reopen. That's got to be cheaper than closing your existing business and starting again from scratch.

[disneysteve]

Not sure if you can filter posts by user...but look at his last 30 posts compared to him posting 3 months ago. He was insanely stressed. The financial impact was hitting him hard. This will be a wake up call to him and others in his position. You need reserves on hand.

TH had reserves. That's why he was able to continue paying his staff despite having zero income. And rent and other expenses. Thankfully for him, they were able to reopen on Friday so he's back in business. But so many business seems to have little to no reserve. As soon as the income stops, they're in deep trouble - just like the millions of Americans with no EF.

[~bs]

So if you own a business and COVID resulted in having to close it for 6-8 weeks, you just walk away? Then what? Do you declare bankruptcy and then turn around and open a new business? If that business provides your livelihood, you can't just walk away and be done. You need something to generate income. Doesn't it make more sense to use your emergency fund (assuming you have one) to get you through the emergency and then rebuild once you're able to reopen. That's got to be cheaper than closing your existing business and starting again from scratch.

It really depends on your individual situation, and how long the pain is expected to last. And if you can walk away without huge pain, you should. Remember no income is much much better than sustaining huge losses. This is likely what texas huckster is finding out right now, and largely the difference between his vacation rental and commercial business.

If it's not that easy to walk away in such a manner, then you need to do your best to ride it out. Much like investing, if you think the losses are going to be horrendous and long lasting, you cut the losses early and try something else rather than being left holding the bag. If I thought my current business model wasn't sustainable for the future, I'd wind it down and exit in a heart beat. The analogy might be a hand with gangrene. You cut the hand off, which is traumatic and painful for the patient, or you try to save the patient, who ends up dying.

[Scallywag]

No many people can afford "reserves".

[disneysteve]

It really depends on your individual situation, and how long the pain is expected to last. And if you can walk away without huge pain, you should. Remember no income is much much better than sustaining huge losses.

Much like investing, if you think the losses are going to be horrendous and long lasting, you cut the losses early and try something else rather than being left holding the bag. If I thought my current business model wasn't sustainable for the future, I'd wind it down and exit in a heart beat.

That last sentence is certainly true but not really what I was asking about. Yes, if you think things have changed such that your business is no longer viable, then you need to get out. I have another thread about Sweet Tomatoes/Soup Plantation shutting down. Their CEO said that their business model - a self-serve salad bar - isn't going to be feasible going forward due to sanitary concerns. He saw no way for them to continue forward so they're out.

But what if you think your business will be just fine once you can reopen the doors?

And this thread really isn't just about COVID. It's about businesses having an emergency fund in general. A lot of things can happen to reduce or eliminate your income short term. A couple of months ago, there was a big fire at a strip mall near us. Six businesses were destroyed: a bakery, a women's boutique, a Starbucks, a pet groomer, a cosmetics store, and a Vietnamese restaurant. That situation is a bit different because hopefully all of those businesses had insurance to cover most of their losses but I'm sure those owners will still have expenses not covered by insurance. If they didn't have an emergency fund, what do they do? Maybe they can get loans to help but that's assuming they can get a bank to lend them money when they will have no income for months while the places are being rebuilt, or at least the time it takes for them to find new locations and get their businesses up and running again. And if any of them do decide to not rebuild, they still need jobs and incomes. Will they give up on owning a business and just go work for someone else? Very few business owners I know would want to make that change.

[~bs]

If it's small business then the "emergency fund" is basically their personal savings. Some may have large personal savings, others may not. Obviously better to have more reserves than less, but like with personal finances, mileage varies. Some may want to dip into personal savings to restart, others would rather take the insurance money and try something new. In the current situation, covid is a good reason as any to end your lease early and wait until things get better and you can pivot into a different business. If the owner thinks their business will be fine, in a month or two, then they will dip into their savings and wait out the crisis, which some are doing.

[scfr]

Maybe that's the answer. Entrepreneurs, pretty much by definition, are not conservative people. They are risk takers. They can't stand sitting on a pile of cash. They just keep thinking of what they could be doing with that money, how they could be putting it to work to make even more money, damn the consequences. If something unexpected happens, they'll just take out a new credit line or charge stuff to their American Express business card.

I guess that's why I'll never be a business owner. I couldn't function like that.

Every business owner is different. Speaking from experience, some balance the risk of owning a business with a conservative personal investment stance. Years ago when DH & I consulted with a CFP we were told we were not unique, that many business owners do the same. But of course, I'm sure many are the born gamblers that you describe.

[Snave]

We own a restaurant and margins are extremely thin. It's not like a shoe store where you can put inventory on a back shelf at 40% off. Can't do that with food that doesn't sell. As for us, it isn't just a "2-3 month break," but rather these months are typically our best months that allow us to have a war chest going into November when we are barely breaking even. It is not just these essential months that we have missed, but also the closures that are happening the rest of the summer. We are in downtown Columbus, Ohio and many events that take place downtown drive our business. Having Red, White and Boom 4th of July event cancelled is a 30K loss just for that night. Cancelling the Arts Festival which is on the streets surrounding us cuts that week down from $120K to what, we don't even know this year. Throw in all the other festivals and evens that are cancelled and this is not just a 3 month "time-out" for us. We will be impacted all summer and unfortunately will enter our extremely lean months where we lose or break even without our normal cash on hand. It is interesting to say the least. Our rent is fairly expensive because we typically do well from a revenue perspective based on our location. This year, we will get trounced with no employees downtown to cover business lunches, no theatre shows which are a lot of our evening diners and obviously no events. I wish it were as simple as a 3 month "break" where everything picked back up. Not only have my kids been learning geometry, history and their foreign language while being home schooled, they are learning about economics also! The restaurant is one of our two small businesses that we own that were shut down completely.

[ua_guy]

For larger companies, it's been cheap to borrow money for so long. Cash sitting on the books is opportunity.

Also, considering the mergers and acquisitions in the 80's, having a large cash "asset" is attractive for another company to come in and buy controlling stake via shares, and then they control that cash. As was the case for a lot of companies, they were disassembled, the cash was extracted and all the assets sold off.

[disneysteve]

We own a restaurant and margins are extremely thin. It's not like a shoe store where you can put inventory on a back shelf at 40% off. Can't do that with food that doesn't sell. As for us, it isn't just a "2-3 month break," but rather these months are typically our best months that allow us to have a war chest going into November when we are barely breaking even.

We will be impacted all summer and unfortunately will enter our extremely lean months where we lose or break even without our normal cash on hand.

Thank you for sharing your insight. Can I ask you a question? Why do you do it? It doesn't sound particularly lucrative. Why put in what I'm sure is a tremendous amount of work for a business that runs such a thin margin and barely breaks even or even loses money for several months each year? I don't run a business but if I did, I think I'd certanly expect it to turn a nice profit. If not, what's the point?

[~bs]

Thank you for sharing your insight. Can I ask you a question? Why do you do it? It doesn't sound particularly lucrative. Why put in what I'm sure is a tremendous amount of work for a business that runs such a thin margin and barely breaks even or even loses money for several months each year? I don't run a business but if I did, I think I'd certanly expect it to turn a nice profit. If not, what's the point?

Some businesses types operate on higher volume, lower margin. Restaurants are typically 5% margin. A restaurant that grosses 500k/month in busy times nets the owner $25k/month. Even a 2% profit margin is 10k/month.

The main challenge for a low margin business is that things can turn from a profit to huge losses quick. A 25% reduction in sales probably turns a $25k/month profit into a $100k/month loss.

[LivingAlmostLarge]

We own a restaurant and margins are extremely thin. It's not like a shoe store where you can put inventory on a back shelf at 40% off. Can't do that with food that doesn't sell. As for us, it isn't just a "2-3 month break," but rather these months are typically our best months that allow us to have a war chest going into November when we are barely breaking even. It is not just these essential months that we have missed, but also the closures that are happening the rest of the summer. We are in downtown Columbus, Ohio and many events that take place downtown drive our business. Having Red, White and Boom 4th of July event cancelled is a 30K loss just for that night. Cancelling the Arts Festival which is on the streets surrounding us cuts that week down from $120K to what, we don't even know this year. Throw in all the other festivals and evens that are cancelled and this is not just a 3 month "time-out" for us. We will be impacted all summer and unfortunately will enter our extremely lean months where we lose or break even without our normal cash on hand. It is interesting to say the least. Our rent is fairly expensive because we typically do well from a revenue perspective based on our location. This year, we will get trounced with no employees downtown to cover business lunches, no theatre shows which are a lot of our evening diners and obviously no events. I wish it were as simple as a 3 month "break" where everything picked back up. Not only have my kids been learning geometry, history and their foreign language while being home schooled, they are learning about economics also! The restaurant is one of our two small businesses that we own that were shut down completely.

What sort of profit margins do you expect? What is your other small business? What has happened to you?

[Snicks]

Many businesses do have emergency funds. And, they are hanging by a thread right now and we still haven't opened. So, I do think they have funds. However, funds are not indefinite. I mean, our School District of 1500 kids has a 27M budget, but if revenue stopped coming in, the District could really only survive for a few months. There is a cycle of earning and spending and one can only conserve for so long without bringing anything in.