In recent weeks we have listened on the one hand to companies complaining about coffers already emptied by the pandemic and begging the disbursement of a lot of liquidity, on the other the health authorities who recommended a slow graduality of the restart. It seems to me overestimated the suddenness of emptying the coffers e the consequence of the gradual recovery on operating losses was underestimated.
THE BALANCE SHEET OF ITALIAN COMPANIES
As far as cash is concerned, at the beginning of 2020 medium and large Italian industrial companies were in better health than people think. A year earlier (the most recent aggregate final figures are as at 31 December 2018) the important companies had world-class risk capital, liquidity and working capital. Let me be clear, the origin of this excellent state of health lies in the multi-year period investment fall, therefore of the outgoing cash flow, which was much lower than the incoming cash flow (from internal economic management), despite the incoming flow being cut by a generous policy of distributing dividends to shareholders. The cash flow surplus (incoming minus outgoing) was used by firms to repay financial debts to banks: other than asking for and not getting loans as they commonly say.
The state of patrimonial and financial health at the beginning of 2020 was able to face for a long time any losses due to a closure of the factories. Also because the losses would have been small given that, with production at a standstill, the only costs to bear are fixed costs (labor and depreciation), but layoffs (of course, as long as it arrives once and for all) lighten the cost of labor and depreciation they are not an expense, they are a provision (moreover not urgent given that many repayment installments of debts to banks have been frozen).
Therefore, at the beginning of the pandemic, the point of the crisis was not financial. Medium and large companies had money. The situation of small and micro enterprises was very different and much more serious, to which the government promised cash without keeping its promise.
THE CONSEQUENCES OF A SLOW RESTART
As regards the gradualness of the restart, this adds up to the organizational consequences of social distancing in workplaces (factories and offices). The overlapping of the effects translates into an insufficient degree of utilization of production capacity, or degree of filling of transport capacity (train, bus, plane), or degree of filling of accommodation facilities (restaurants, bars, hotels) or commercial facilities (hairdressers, retail distribution). The degree is insufficient in the sense that it is lower than the break-even pointi.e. the equilibrium point at which operating costs balance revenues. Below this use there is a loss of operational management. Above operating profit.
We remind you that from the operating result (positive-profit or negative-loss) both the charges accruing on financial debts, and then the extraordinary management items, and finally taxes, must be subtracted. All this to say that when we leave, we leave, and fixed costs take off and weigh like a boulder on modest revenues. If already at an operational level it is below break-even, in the end the net losses are very strong and erode the capital invested by the shareholders. Strong enough to discourage companies from restarting.
For these reasons, the low cost airlines disregard the health rules and fill the planes. Therefore, the tourist structures give up opening, they know that their activity lasts the summer season and this year the whole summer would coincide with the transitional period of restart. Why then open and lose an avalanche of money? For this same reason, the railway companies run few trains every day and try to balance the low demand of passengers and the health constraint of filling the spaces with the aim of staying above the break-even point.
For those categories that fixed costs (rent of traders' and hairdressers' premises, state property concession fee for bathing establishments) they tolerate them even if they remain closed, it is preferable to leave again anywaybecause little is better than nothing.
All the government's action has shown a very justifiable health prudence, but a lack of sensitivity to these two essential aspects for the system of medium and large companies: financial (liquidity) with factories closed and economic (losses) with factories to restart . The bottom line is that a compaction of reopening times (compatible with the containment of the pandemic) it is enormously more important than sprinkler distribution (and in words more than in deeds) of liquidity to companies.
*President of the Business Observatory, University of Rome "La Sapienza", Faculty of Engineering
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