The very definition of a “silent killer” is that it is something that has the potential to kill but is hidden, often until it is to late! The situation has often been around for months, or even years, usually going totally undetected until one day it shows its ugly head. What was not a problem yesterday is suddenly staring the person or business in the face today. The potential exists for serious damage or even death. We are all familiar with these kinds of situations when it comes to our health. We feel good so why go to the doctor, right? Then one day, seemingly out of the blue, a serious health problem pops up. Situations like this are often preventable, especially in the early stages, but the root problem goes undetected.
Debt is like that in our businesses. It’s a silent killer that grows and grows until one day it has the potential to put the company out of business. Debt comes in several forms. Some are more visible than others.
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Credit Card Balances:
A few charges here and there don’t seem like much until the bill comes in. Cash flow is tight so rather than paying the bill in full only a portion is paid. If a pattern like that persists it can “suddenly” become a significant stumbling block with debt amounting to thousands of dollars. In extreme cases, cards get maxed out and are therefore no longer available for quick purchases. -
Line of Credit:
Lines are credit are designed for one purpose and one purpose only. Short term borrowing against receivables. When a customer fails to pay on time, we tend to borrow on the line of credit therefore easing cash blow a bit. In theory the line of credit gets paid off when the overdue payment arrives resulting in the balance being once again zero. However, as we all know, that is often not the case. The line of credit becomes instant credit for whatever the need might be and tends to increase each month until it becomes a significant amount of debt. -
Bank Loans:
Bank loans a more intentional and therefore visible. However, the end result is the same. More debt is added to the company’s balance sheet. -
Delayed Payments to Your Supplier:
Who needs a bank when you can delay payments to your distributor! Again, cash is tight so rather than paying the bill in full, on time, payment is either delayed or simply not paid in full. The debt increases and interest payments tend to start mounting up.
The problem with debt is that it is not obvious on the P/L Statement. Paying off past credit card balances, paying down lines of credit, the principal portion of the loan payment and paying down balances from suppliers don’t show up on the P/L. Ouch! Out of sight…out of mind. All those things must be paid each month but since they don’t show up as expenses on the P/L they go unnoticed resulting a false picture of the company’s profitability. Money flows out but you don’t see it. What looks like profit isn’t.
Make Debt Visible
Being aware of the company’s overall indebtedness is important. Make a physical list of all the company’s debts and then total them up. Do this every month. It might even be a good idea to create a graph and plot your progress each month. Look for trends. Is the graph trending up therefore debt is increasing? Is total debt trending down therefore debt is being paid off. Simply being aware of the company’s indebtedness will tend to affect future borrowing decisions.
Apply Dave Ramsey’s Debt Snowball Theory
Dave Ramsey teaches a theory called The Debt Snowball. Make a list of all monthly debt payments and the balances owed on each. Concentrate on paying off the lowest balance debt first. Let’s say the monthly payment is $350. When that debt is paid off apply the $350 to the next lowest balance payment. If the next payment were perhaps $475 a month, add the $350 (after debt #1 is paid off) to it making the monthly payment $875. When that debt I paid off apply the $875 to the next item. With discipline, debt will disappear quicker than you might expect.
Eating a greasy hamburger once day is not a problem. Doing it every day can seriously damage your health. Debt is no different. Uncontrolled spending can easily kill a business. Make it a company priority to get out of debt as soon as possible.
Tom Grandy
Company Founder
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