How Debt Could Be A Good Thing For Your Business
You know the satisfaction you feel when all of your debts have been settled and any extra cash flowing into your bank account is purely disposable income? Neither do I. But, contrary to popular belief, if you are a business owner, carrying a little extra debt could be a good thing – when handled strategically, carefully and responsibly – and here’s why …
One of the most important jobs a business owner has is to prepare, monitor and analyze their company’s cash flow. As the single most important tool you have in your business’s arsenal, your company’s cash flow (business income minus its cash payments) provides you with an accurate way to measure its overall financial wellness.
Do You Know What You Need to Grow?
One of the most powerful ways to measure how well your company is doing is to monitor its projected/forecasted cash flow while analyzing the business’s past financial information.
- Your company’s projected/forecasted cash flow should provide you an educated prediction of your future cash income and expenses. You can use this information to develop the initiatives needed to ensure the long-term growth and sustainability of your business.
- When you monitor your company’s past cash flow you will tap into the data needed to zero in on the business’s strengths and weaknesses – effectively shining a light on processes, products, services and strategies that are hindering your company’s growth. Then you can act quickly to build upon the objectives that work and eliminate those that hinder ongoing success.
Traditionally, companies with strong, positive cash flows are those with proper pricing models in place, a healthy labor force, controlled spending and active collections. (Notice that I didn’t say that these companies were debt-free!)
Leverage Cash Flow, Leverage Your Debt
The word “debt” has a bad reputation. Yes, for many reasons, living your life and managing your business “debt-free” can be a great thing. But, especially in business, working exclusively for the purpose of eliminating all debt can actually hinder you from experiencing healthy, sustainable growth. For example, in the quest to settle your company’s debts, you may be left with an anemic savings account and little-to-no cash to jump on opportunities that arise and could potentially propel your company to new heights. As a savvy business owner, you should always anticipate changes that could positively and negatively impact your business. The key is to leverage your company’s cash flow. Here are two ways you can get started.
- Take advantage of financing opportunities with favorable interest rates. Oftentimes, especially if you have taken the time to develop a strong relationship with a local financial institution, you can secure financing at a very low interest rate. This will allow you to take the cash that was not used to finance your project and reinvest it in your outside investments in order to diversify your personal net worth, which may provide you with a better return and decrease your overall business risk. For example, in the current market, if you are able to finance new equipment for your company with an interest rate of 4 percent, you are free to invest your own cash in another investment vehicle, which could yield a return rate greater than the interest charges you owe to the bank per your financing agreement.
- Utilize a line of credit. One of the best ways to invest in your business is to make sure you have the cash on hand that will allow you to take advantage of unforeseen opportunities. It’s hard to predict when a strategic partnership or change in the marketplace can open up a door that had previously remained shut. But when it does, an open line of credit makes seizing the opportunity possible while ensuring that your business’s current operations remain unaffected.
If you practice strategic control over your business, make sure you are giving your cash flow the same attention. To properly leverage your company’s debt you must constantly monitor your cash flow to ensure that these strategies make sense for you. Email Rea & Associates to learn more about leveraging your cash flow and whether it is the best move for your company.
By Tom Jeffries, CPA (Millersburg office)