Any business that started in the past 10 years has only experienced one type of economy and one type of business environment. That would be a growing and healthy one. In 2010 The S&P 500 (a good gauge for stock market and overall economic health) started at $1,116 before closing at $3,393 in February of 2020. Over that 10 year period the stock market increased 204% or 12.5% per year. United States GDP has grown by an average of 2.25% per year over the same period. Debt was the cheapest it has ever been as interest rates were at all-time lows, averaging around 4%, much less than the 8-9% average of the prior 40 years. All of these factors contributed to the longest, most business friendly economic environment in recent American history.
Due to this environment, many of those business never had to cut costs or create contingency plans for a downturn. All they have known is growth, growth, growth. This is why a number of businesses were hit hard when the COVID-19 induced economic downturn occurred. Projections from economists and advisors estimate that 20%-30% of all businesses will close permanently from this downturn. This is especially true for the businesses from the last 10 years. Since times have been so good, there has been no reason for these businesses to build up a large savings, which is the key to survival . Businesses haven’t needed to maximize efficiencies and work processes, or practice financial discipline because the work and revenue has always been coming in for them. Basically they could make money without running the business well because the business environment was so advantageous. Many businesses have not saved much of their previous years’ income, as the average business 2 months of cash flow saved, while the recommended amount of savings is 4-6 months. With the economy shut down for two months now, many of them are starting to run out of cash and will struggle to keep their doors open for much longer. With debt being the cheapest and most accessible it has ever been, many businesses have become over levered and cannot afford to make either their principal or interest payments on their debt. As a result a number of businesses will be declaring for bankruptcy because they took on too much debt without planning for any sort of downturn or contingency
Many businesses have never experienced a downturn in the economy and business environment, they have only experienced growth, cheap debt, and a healthy environment. This is a hard but a good lesson for businesses to learn that even in times of business expansion, always have a backup plan, be prepared for a downturn, and keep 4-6 months of business savings.
By Robert Rusnak