A Lifeboat for Those Drowning in Debt
It was horrible, uncomfortable…and terrifying! A snow storm hit Seattle this week, and the city virtually shut down. No power, no schools, no nannies, no last minute Christmas shopping – but that was all ok. The real terrifying part was when the kids want to go out sledding and I had to have the annual battle of “will I fit into my ski pants?”
As I pull on my ski pants I tug, pull, and chagrin, and finally the pants barely go on, but only if I don’t plan on moving around. How can I sled if I can’t even sit? The dreaded day has come. I can’t rationalize anymore. I have to face facts because no matter how you slice it, change must happen today! Yesterday I could ignore the problem, just like all the days before because there was not anything tangible screaming “ENOUGH!”. Now it’s obvious – the pants don’t fit, and if I want avoid an embarrassing rip up the rear end, I have to make some changes, like it or not.
So, as this is occurring I realize that this is a small potatoes problem, but it is really very similar to an issue that 3 callers in the last two weeks have had with their business. I have had 3 separate distressed calls from people worried that they were drowning in so much debt that they felt that they may lose their business, or even declare bankruptcy. As you can imagine it is very stressful to know that you have built a business that would be very profitable, but debt is sucking the life out of it. How does it happen? Didn’t they see it coming? NO! – and that’s just how the credit system works. You don’t see it coming. It sneaks up on you a little here and there, until one day you don’t have the cash flow to make the minimum payment, and there is no more credit to be had – Your ski pants really don’t fit, and they are cutting off your circulation!
Not to worry – this can be fixed. The solution may be a little uncomfortable at first, but it can be fixed and the solution is rather simple. Much like my ski pants I may want an easy miracle but the only way to make change is by adjusting the inflows and/or the outflows. In your business that means making more, and/or spending less.
Credit is a useful tool for businesses to get you through those tough spots and even out the ebbs and flows of cash flow. Credit is most useful when you start your business to buy a franchise or make those initial investments. However, you need to be alert of the credit gotchas. Here’s a game plan that has worked for my clients that have succeeded in digging their way to debt freedom.
1. Budget – Have a budget and use it! Be alert and check your actual revenues and expenses with your budget regularly. When first starting this process I like weekly comparisons so that you find problems with enough time to fix them. I you are telling yourself that “I can’t do that because I am too busy”, I would tell you that if you only did one thing all week that is the most important things to do. You cannot change what you cannot measure, so you must do this.
2. Do a Backwards Budget – If your budget just isn’t coming out positive, then you need to start from nothing and add things in. Most cleaning businesses could be run in a pinch from their garage, with the owner doing all of the administrative work, and buying cheap supplies at Costco. Done like that if you are paying your people in the field correctly you are likely making 50% gross profit. On our sample $40K/month business that means, business life without luxuries gives them $20K/month to pay themselves and debt. After calculating your needed salary and debt pay down, you can use the rest to pay for luxuries like an office, office staff, office supplies, etc. You may not think of these things as luxuries – but, if you are drowning in debt you are volunteering to give up your salary and financial peace for these things. When I ask clients “would you rather have a fancy office or a salary that will pay your mortgage?” the choice is very simple for most. Once you get your debt paid off, you can add in more luxuries, and know that you can afford it.
3. Increase Your Inflows – Although I want you to create a budget that assumes that your revenues stay the same, you can improve your situation by increasing your income. How many new people have you talked to this week about your business? You must get the word out, and set a goal for how many new people you will sign up with. The increased inflows can be used to pay off your debt faster, and get you to financial freedom sooner.
4. Legitimate Debt Only – For all future credit only use it for legitimate needs, and have a plan for immediate payoff. Things like emergencies, initial reasonable marketing investments, equipment that will be put to immediate use, building purchases, software or products that replace labor, etc. The most important thing is to not bite off more than you can chew. If business does not improve ask yourself “will I be able to handle the payments to pay the debt off quickly?” If not you don’t expect that you will, then you can’t afford it.
5 Business Debt vs. Personal Debt – Try to build credit in your company name instead of in your personal name. Your personal credit score may be adversely hit if it shows that you have $20K in debt in a year with very little personal income, but a business that revenues a consistent $250K a year, for example, it would not be a red flag because it is not that unusual.
6. No “Miscellaneous” Expenses – Nothing should occur in all of your banking accounts (checking, credit cards, etc.) that does not have a category on your budget. So, no “Misc.” category. It is the small things that add up to big problems.
7. Never go over your limits or pay late – If you don’t want to see your interest rates and debts grow exponentially then never pay late, go over your limit, or pay your taxes late. You may not realize that your credit card may allow you to go “over limit” and accrue sometimes double the interest rate without even notifying you that you are over limit, but it can.
8. Don’t waste time feeling guilty – Things happen, and you can’t spend time kicking yourself about the debt, instead you need to get busy with immediate action. Small changes applied with consistency will kill this demon. Emotional responses will only feed the beast.
9. Build an emergency fund – Once you have paid off your debt, begin to save an emergency fund. Try to build your budget around 5-10% of revenues going to your emergency fund per month. Think of if you had done that last year, how much would you have by now? 120% of your revenue monthly would be there waiting in your account for you.
It is possible, and I have had clients who have paid off tens of thousands of dollars in debt in a relatively short amount of time, and you can too. As for me, I am going to go eat a salad!