When income stops, small businesses don't even have enough cash to last one billing cycle.
Less than a month. That’s how long half of all small businesses would be able to pay their expenses if their inflows suddenly stopped.
To be exact, the median small business maintains enough cash to withstand 27 days without additional income, according to a recent JPMorgan Chase Institute study, “Cash is King: Flows, Balances, and Buffer Days.”
The study results come from JPMorgan Chase Institute analyzing more than 470 million transactions conducted by 597,000 small businesses from February to October 2015.
As far as industries go, restaurants hold the smallest number of cash buffer days at 16 days of reserves. The real estate industry holds the highest number at 47 days. Falling in between, the metal and machinery and healthcare services industries hold 28 days and 30 days, respectively.
Building up reserves is no easy task, either. The median business only nets $7 each day between their inflow ($381) and outflow ($374).
“Many small businesses may not have enough cash to continue operations in the face of a month-long loss of cash inflows due to an economic downturn or other negative shock,” the report stated.
These findings go hand in hand with the recent decline of small business sentiment. NFIB’s Small Business Optimism Index dropped 0.2 percentage points to 94.4 in August, below the index’s 42-year average of 98. These statistics are the result of small business owners’ fear and uncertainty over the 2016 election, with 39 percent choosing not to expand due to the political climate.
However, not everything is out of small business owners’ control. “What most small businesses should be thinking about is having a clear sense of what their liquidity picture is,” said Diana Farrell, CEO of the JPMorgan Chase Institute. “This is an immediate thing that would impact a large swath of small businesses that they themselves can act on.”