Avoiding a Mountain of Debt-Using other people’s money wiselyChia-Li Chien
Chia-Li Chien | April 25, 2011
Using other people’s money is a term I’ve heard over and over for many years. I’ve seen people who have figured out how to successfully build wealth in their business as well as on a personal level. However, I have to say, many of these same people really don’t know how the concept of using other people’s money works and have ended up with a mountain of debt that ruined their business or even their personal lives.
After the U.S. financial crisis that began in late 2008, we’ve seen Greece in a massive government bail out, and now Ireland’s Central Bank is going in the same direction. Perhaps it’s a global trend caused by people or businesses believing that using other people’s money is just simply the way to do business and build wealth. As economists and pundits try to sort out what has happened in the U.S. it becomes all-too apparent that greed and the pursuit of material goods pushed many to living beyond their means. Recently Suzy Orman hosted a new PBS special “Money Class” in which she really encourages people to live below their means. I have to agree with Suzy on this one.
Living below your means applies to businesses as well. Traditionally, business owners draft an annual business plan, follow through and adjust the plan accordingly throughout the years. It has become clear to me that business owners who really take time to write an annual business plan are the ones steadily building up their business value.
In my experience, the main reason people fail to create a business plan is because they fail to hit their numbers, and as a result, cannot see the value in creating a plan with goals they never make.
I help all my clients prepare annual business plans, or as we call them “annual growth ACTION plans” and hold them accountable. The results? Those clients experience a 25%, 100%, 200% or even a 300% growth in revenue and net profit. While many do rely on “other people’s money,” all of them get out of debt as quickly as possible in order to focus on building that “value” engine within the company and ultimately create wealth for themselves.
David (not his really name) is the head of a nationally recognized business brand. He is in charge of a local, independently owned location. He shared with me their three-year financial statements and 2011 projections. Before we got too far, I realized David’s company had not made a profit for over ten years. In order for him to stay in business, he either took loans or lines of credit continuously over that period of time. For ease of math, let’s just say he has less than half a million in revenue but has accumulated over one million dollars in debt. In his sales projection, he continues to add a $150,000 line of credit a year to his operation so he can keep things going.
So the question David had for me was “is this a viable business?” Well truthfully, if other branches are operating with a profit, is it not about whether the business is viable. It’s really about what can David do to increase revenue and decrease expenses, and what can he do to pay down the debt over time. You see, when the debt level is too high, companies like David’s have less value – or perhaps no value at all – to investors.
Now David finds his business is in a situation that will take years to rectify and rebuild – even with the right business model – not to mention paying off the debt and building up the company to be attractive for not only investors but also clients and employees too.
Perhaps the advice you received in the past, like David, was to borrow more money to stay in the game. However, that tactic is no longer the right thing to do. As matter of fact, it may never be the right thing to depending on the type of loan structure required to operate the business. Obviously, when it comes to business expansion, you might need capital, but be sure you have a plan to generate enough revenue to pay down the debt. If you are in debt now and did not have a plan to pay off the debt, act quickly and figure out what type of revenue can ultimately get you back on track.
You are in business to create profit – not debt. Even non-profits must break even to remain operational. If your business is not making enough profit to be worthwhile of the risks you took to be in business, I encourage you to work with the right team of advisors who can really help you get back on track.
How do you know if you’ve been led by wise advisors? Well, if you’re not making a profit, business has stayed flat for years your net profit rarely increases and it’s been tough to increase market shares, you know you don’t have the right advisors on the team. Make sure you only work with advisors who can help you increase revenue or decrease expenses.
But first, as a business owner, you may need to ask yourself some hard questions and make mental adjustments about living below your means.