What Small Businesses Need to Learn from the Corona Virus (Covid-19) Financial Crisis

BC is now three weeks into the social distancing protocol.  It is becoming more obvious that the distancing will go on for another month if not longer.  With this acknowledgement, the financial cost of this pandemic will reach financial crisis level when said and done. 

I am already reading about long existing local brands closing their doors just three weeks into the social distancing.  Some businesses are likely closing down strategically.  After all, if we are expecting social distancing for the next three to four months, the enormous commercial rent many businesses face with revenue close to NIL, it makes sense to just close the business altogether. 

The Decision For Small Business To Close Doors During Covid-19?

For many small businesses, many decisions made in the current past, no matter how strategically thought out and executed, would not help the business and its owner/shareholder suffer any less.   This is the essence of entrepreneurship risk. 

One simple business decision that we all can make to mitigate entrepreneurship risk is our holding of cash.  Right now, cash is king.

Cash Is King

During the past 15 years, for business owners (and individuals), having plenty of cash in the bank has been a losing proposition.  Given the economic fairy tale that existed in Vancouver and the cheap credit from major banks and credit unions, why “invest” in cash?

The problems of cheap credit are many and well documented.

  • Cheap credit distorts small business decision making process.
  • Cheap credit allows money losing businesses to stay in business.
  • Cheap credit gives small brands that are just profitable enough the confidence to expand.
  • Cheap credit allows business owners to “invest” too much on leaseholds.
  • Cheap credit dares business owners to buy expensive commercial space.
  • Cheap credit allows small business owners to use retained earnings and obtain further leverage to buy investment properties.

Right now, simple cash in the bank would be a blessing. Leverage requires repayment of the debt even when the asset cannot generate income in the foreseeable future. This is the essence of leverage risk.

For BC, the 2008 financial crisis was hardly noticed.  Even 9/11 impacted the US much more than Canada.  For many business owners, this pandemic is the first financial crisis of their lifetime.

I hope the term “safety in cash” also comes back to vogue.

We Are Open During Covid-19

Our office is open for phone discussion during the social distancing period.  Please email the office with your question and a cell number where you can be reached.