Cash is King, But Cash Flows and Buffers Smaller than Many Think: The Inaugural JPMorgan Chase Institute Report on U.S. Small Business Finance
In an inaugural report on U.S. small businesses, the JPMorgan Chase Institute found that most of nearly 600,000 small business customers of JPMorgan Chase held insufficient cash reserve cushions to ride out “a significant economic downturn or other disruption”. Set up last year by JP Morgan, the Institute is tasked with delivering data-rich analysis and expert insights from anonymized, transaction-level data, providing a bottom-up view of developments not obtainable from macro-level data or self-reported surveys. In concluding that “Cash is King”, the report’s authors ground through more than 470 million transactions from February to October 2015, noting that only half of the small businesses reviewed held cash buffers adequate to cover more than 27 days of typical outflows.
Reserves were smallest for restaurants, repair and maintenance companies and retail firms and largest for real estate companies, high-tech manufacturers and service providers and professional services firms paying higher wages and characterized by greater capital intensity. The median cash balance equaled only $12,100, varying from $5300 for personal services firms to $34,200 for high-tech manufacturers.
The report found that most U.S. small business cash flows are smaller and generally thought, with limited liquidity in the form of bank deposits leaving many vulnerable to shocks. Firms in low-wage, labor-intensive industries were seen to be especially vulnerable. Note was taken of the harsh Northeast winter of 2015, during which restaurants and retailers lost half their sales during a month-long period. This caused considerable stress with median cash buffers in both sectors of just 16 days. More generally, the study noted than other shocks, unexpected expenses and unpaid customer receivables pose considerable risks to many small businesses, with median daily cash inflows of only $381 for the firms reviewed. The challenges posed for small businesses trying to secure credit in such circumstances are manifest, with data from the Federal Reserve Bank of New York showing that applications for traditional loan products take 24-33 hours to complete and 60-90 days for funds to be received when those applications are successful.
Given these findings, the report underscored the importance of helping small business owners to manage liquidity and improve financial resilience. Increased access to credit could provide a needed lifeline, but managing cash flows better to build larger buffers equal to more days of regular outflows was seen as equally important. A more diverse set of credit offerings is needed to meet the needs of smallest and most financially fragile of U.S. small businesses. These should be focused more on short-term liquidity needs than capital Investment, as is now often the case. CAPline loans from the SBA were cited as one example of a credit facility well-suited to address short-term working capital needs. Educational programs remain just as important, whether provided by public, private or nonprofit organizations. Tax policy, finally, might be less a potential help to small business owners than process-oriented reforms that would enable them to manage their records better, which could help them to improve their cash flow management, reduce filing costs and take fuller advantage of existing tax incentives.