Some Quick Math on How the Federal Government Has Spectacularly Failed to Protect Small Businesses
The federal government either doesn’t know or doesn’t care about small business.
BY DAN DEWEESE
[Note: If any small business owners or government employees want to chime in to modify or correct aspects of the following scenario, feel free to email editors@propellerbooks.com.]
THE VAST MAJORITY of your favorite local restaurants or shops—the ones where the owners actually work in the business and live in the neighborhood and therefore know your name and care about you as a person—are in danger of going out of business within the next few weeks. The reason is that the federal government of one of the most laissez-faire capitalist economies in the world doesn’t appear to know how business works.
If you don’t like math problems, I would suggest skipping the rest of this article. I’m going to work through some math on how a locally-owned small retail business—let’s call it Sally’s Stick Candy—has been in trouble for almost five weeks now, during those five weeks has been helped not at all by any form of government, and will probably have no choice but to declare bankruptcy within the next month or two.
The federal government’s assistance program for small businesses during the Covid-19 crisis is something called the Paycheck Protection Program. Here, in short, is what the Paycheck Protection Program is offering Sally to help her stick-candy business (because I live in Oregon, I am using a document posted by Oregon Senator Jeff Merkley for these quotes): a forgivable loan to cover eight weeks of “payroll and operational costs.” This amount will be figured as “the average total monthly payments for payroll costs from the prior year before the date the loan was made, multiplied by 2.5.” In other words: figure out what your average monthly payroll costs are, Sally, multiply that by 2.5, and we’ll give you that amount of money.
There you go. That’s it.
Let’s now think about what Sally has actually been going through, financially, since late February. To start with, let’s imagine a typical small business in, oh, I don’t know…downtown Portland, Oregon. (I owned a tiny pop-up business, Adelina Film & Art Books, in downtown Portland, Oregon, and I continue to work closely, in a book-centric way, with a fantastic small business in downtown Portland, Oregon.) I am going to use round numbers to make this scenario easier to keep track of, but the numbers should be roughly accurate and more or less scalable for small businesses in various parts of America.
[Quick aside: I know that if you’re into math, you’re going to be tempted to start playing the Game of Business and questioning these numbers or seeing if you could tweak these numbers by imagining a different location for Sally’s Stick Candy, or a different number of employees, or saying maybe Sally should sell sandals instead of stick candy, and so forth. And that’s fun, that’s the Game of Business, but for now let’s show Sally some respect and understand that Sally has been playing the game of running a stick candy business for a number of years, and she kind of knows what she’s doing.]
Sally’s average gross monthly sales: $30,000
BUT: Sally’s average monthly net sales profit (because you have to pay the stick-candy makers): $15,000
Sally’s monthly rent for her shop: $6000
Sally’s monthly payroll expenses: $5000
Sally’s other monthly business expenses: $1000
Some of you are quick at math and have figured out that Sally only makes $36,000 a year. That is accurate, and there are many small-business owners in town who would in fact be envious of that figure. That local store you go to, where the young employees are a cheerful team and you know the owner, and people in the neighborhood wear the t-shirt from the store, and people love the store and take their friends to it? It is not the road to riches. It’s a month-to-month battle.
If you’re interested in how I arrived at the other figures, you can skip to the bottom of this article, below the line. What I want to point out is just how screwed Sally’s Stick Candy is right now.
At the beginning of March, people kind of stopped coming in to Sally’s Stick Candy. She didn’t sell much, and as the Covid-19 crisis grew, no one came in at all. Sally closed her doors. She has virtually no sales for March, will have no sales in April, and if we flatten the curve and the virus situation therefore takes longer to play out—longer because we are successfully flattening the curve—Sally will not be open in May or June, either. Because Sally tended to make about $15,000 per month on the stick candy, that’s $60,000 in business income gone.
The Paycheck Protection Program is offering Sally 2.5 times her monthly payroll expenses if she keeps her employees on the payroll. For her, this is all of $12,500. She must use this, according to the requirements of the program, to pay her part-time employees their regular wages. So Sally will be paying her employees in April and May to…do what? The stick candy store is closed. There is nothing to do. She can take the money and tell her part-time employees to come into the store and stare at each other, and she can pay them to do that, and that will be nice of her and nice for the employees…but how does this help Sally, the small-business owner?
Sally owed $6000 for rent on April 1st. She had no sales in March. She only makes $36,000 a year and has little to no business or personal savings. The Paycheck Protection Program paperwork didn’t even go online until April 3rd. On April 1st, Sally called her landlord and said, Look, I don’t have the rent. I have nothing. I’m going to fill out the government paperwork whenever it goes online. Maybe that will help.
It doesn’t matter what the landlord said. Landlords aren’t in the business of letting people rent space for free. A patient landlord might say, Okay, you don’t have to pay me now, you can pay me later. That just means Sally now has a $6000 debt she has to pay to the landlord at some point. She has to use the Paycheck Protection Program to pay employees. That’s the requirement. It doesn’t help with her rent.
Businesses don’t have landlords that say, Hey, just stay there for free. I don’t need the rent. If you’ve heard a heartwarming anecdote about a building owner doing that for their businesses, well: That’s great that something like that happened for someone. But it’s not a thing.
Sally will not be open in May. (Don’t say, But the internet! People don’t buy stick candy on the internet.) On May 1st Sally will now owe her landlord $12,000. On June 1st she will owe $18,000. Keep in mind that, at the same time, Sally has no sales. If Sally herself depended on her store for her income, how is Sally buying groceries during these months? If Sally were lucky, she might have been paying herself an hourly rate when she worked in the store—she would essentially be one of her own employees, and could therefore get some of those payroll wages from the federal program. Some small-business owners pay themselves as an employee, some don’t. (I don’t. My small businesses—a small press, a specialty bookstore—have never managed to turn a profit.) If Sally was used to taking home about $3000 a month in March, April, and May, but this year she will take home $0 during those months, she will, personally, be $9000 in the hole. This is in addition to the $18,000 she owes, as the business owner, to her landlord.
That’s $27,000 in the hole. And is she even going to be able to open in June? If she doesn’t, it’s another $6000 she falls behind in rent and $3000 personally. She will be $36,000 behind, and we haven’t even discussed any bills she has to pay to the stick-candy makers for the stick candy she ordered in December, January, and February. Business owners usually have between 60 to 90 days to pay for orders of stick candy, so all the stick candy Sally ordered in January to re-stock her store after Christmas? Those bills are due now. Sally could easily be $50,000 or $60,000 in the hole on June 1st.
The Paycheck Protection Program does not address this situation in any way at all.
What if Sally has kids? What if Sally has aging parents whose care she helps pay for? Of course, there are federal loans she can take out. But think about what that means for a local retail business owner: you have zero income at all right now, and on top of the stress of that, would you like to take out a…$50,000 loan? What if this lasts longer? What if the virus comes back in the fall? Should Sally take out a $60,000 loan? A $70,000 loan?
How will she pay it back?
I wish I had an answer to that, but I guess my point is that there is no answer. The federal government—our supposedly “business-oriented” federal government—has not provided an answer. They have done nothing.
SOME EXPLANATIONS ON HOW I ARRIVED AT THESE ESTIMATES OF HOW THE FEDERAL GOVERNMENT HAS HELPED SMALL BUSINESSES NOT AT ALL
Sally pays her landlord $6000 a month
Some readers might be saying, Holy hell, why is she paying so much in rent? Remember: Sally is running a business in a fashionable city. That figure includes her rent and an amortized amount of the yearly fee she pays toward real estate taxes, insurance, and building maintenance. Yes, that’s a thing. No, the building owner doesn’t pay all of that himself. It’s called a Triple Net Lease and it’s a pretty standard type of business lease. Sally is paying $6000 a month to her landlord and that’s business in the big city.
Sally’s average gross monthly sales are $30,000 and her net is $15,000
Pretty good, right? Obviously, it’s not all stick candy. Sally sells t-shirts, and taffy, and in the summer she has a small rack of sandals and sunglasses, and she has some postcards and some pet treats. She has these things because she knows her clientele and what they like to get from her shop. You don’t stay in business in stick candy for a number of years without kind of figuring out what you’re doing, stick-candy-wise.
Sally tends to get roughly a 50% discount from the stick candy suppliers. (Did you think Sally was making the stick candy? Dear lord, no. Sally is running a retail business. She doesn’t have time to stand in a kitchen somewhere mixing sugar and whatever else and rolling out all the sticks and baking them until sweetly crisp. That’s a full-time job. Somebody else does that—the stick-candy manufacturers do that.) So her net profit on monthly sales is about $15,000.
Monthly payroll expenses of $5000
Sally’s Stick Candy is open from 11-6 Sunday through Friday, and 10-6 on Saturday. That’s 50 hours a week. Sally has to have employees, because she can’t work seven days a week standing in the stick candy shop. She needs to have two employees in the store most of the time, anyway: one running the register and one helping customers. Sally also has to look through catalogs and websites to decide what stick candy to carry, she has to order more t-shirts in different sizes and colors, she has to think about what kind of sandals and sunglasses she wants to carry this summer, she has to pay bills to her vendors, she has pay county and state and federal taxes—Sally has a ton of work to do in the back room just to keep the stick candy business going. So Sally has three part-time employees—Tam, Flip, and Slim—whom she schedules in pairs or to work in the store with her, and she pays them a competitive hourly rate for working retail in Portland. She also has to pay those county and state and federal payroll taxes on top of what she pays them in wages. She’s running a tight ship and she really hustles, so Sally manages to spend only about $5000 a month in payroll.
Other business expenses of $1000
Sally pays a monthly fee for her point-of-sale system—the nifty white spinning screen you put your credit card into, and whatever technology suite it comes with—and she has to pay a monthly fee for her accounting software, and sometimes a fixture breaks, and sometimes Flip accidentally breaks some of the stick candy, and sometimes a t-shirt gets a hole in it and can’t be sold, etc. She also has to buy bags to put the candy in. She pays a janitorial service to clean the shop. She’s running a clean and well-lit business. It costs money to do that.
Unless the federal government comes to its senses, Sally will soon be out of business, as will the vast majority of the locally-owned retail businesses in your city or town.
