I wrote the following short story/example, not for this email list of my little troubles, but as a general way of illustrating for people across social media why businesses won’t just be re-opening, and why our economy as a whole is not some light switch that can be thrown on and off.
Hope you enjoy it!
Feel free to forward, share, or re-publish with credit. People must understand this.
Why The Economy Cannot Just Turn “ON” & Why Businesses Won’t Just “Rehire Fired Employees”
I hope this story, featuring the fictional Joe’s Pizza, helps a lot of people to understand this. I’m using simple, easy-to-follow numbers to illustrate my point. Let’s dig in…
Welcome to Joe’s Pizza (JP), a family run business by Joe and his wife, Mary. It’s been in Joe’s family since the 1955. Joe’s Pizza does very well for itself, making $100,000 a month in REVENUE. Yes, that’s a boatload of pizza every month, but $100k is easy to work from.
A bit of Googling shows restaurant profit margins are 5-15% – let’s take the middle.
So their margin on that $100,000 is 10% = $10,000 a month
This is after…
Rent, ingredients, payroll, debts, insurance, pizza equipment, office supplies, taxes, lawyers, etc, etc
Just $10k.
That means they have $90,000/m in expenses. EVERY MONTH. Just because they have been forced to close down doesn’t mean all expenses disappear. To keep it simple, let’s say that while they make no pizza, and are on COVID19 shutdown, they still have $50k *FIXED* costs.
Yes, most restaurants have trimmed payroll, utilities are cheaper, etc.
Regardless, every month their lights aren’t on, they still need $50k to keep their business going, so that it *CAN REOPEN WHEN THIS IS OVER*.
$50k. Remember that number.
Now, say that Joe’s Pizza has been fiscally responsible to unheard of levels (unlike most Americans). They HAVE saved for a rainy day. Despite having to constantly dig into that $10k of monthly profits for stuff that comes up… Joe’s Pizza has $250,000 CASH IN THE BANK.
And remember, in the midst of this shutdown, they have *FIXED* costs of $50,000.
This means with their cash on hand…
They will last 5 months.
$250,000 GONE in less than half a year!
And: If they burn through all $250k…
It will take them over 2 YEARS to make it up (remember, $10k of margin a month).
This is, of course, assuming that EVERYTHING goes perfectly. Likeliness of that? Small. Shit happens. People will eat out less and conserve their money.
In all likelihood, Joe’s Pizza will NOT survive something like this. Better to cut your losses and get out then burn through $250,000 and still be in a massive hole.
And, this doesn’t BEGIN to touch on the repercussions it has on them personally, and employees.
RIP Joe’s.
I’ve been asked a lot about the SBA loans – why they can’t help Joe’s Pizza out. I don’t know the full ins and outs of the bill, but from what I gather…
- You can get 250% of monthly expenses (that’s $125k in Joe’s case)
- You cannot let go of any employees
Two things:
- What sane business is going to say they won’t fire any employees when they have no timetable when they can reopen?
- That $125k loan only gets them through another 2.5 months.
REMEMBER: Their *fixed* costs are $50k. And $250k in the bank. Now they have $375k. So instead of being able to last 5 months, now they can do 7.5. They will still be in a massive, massive hole.
It also makes an assumption business will go back to normal.
Highly unlikely.
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