The Other Side of the Ledger
Manage Your Debts or They Will Manage YouEvery fast lube business incurs debt. It’s a normal part of business operation. Your broker isn’t going to do it; your accountant isn’t going to do it; and your brother-in-law isn’t going to do it. If you don’t do it, it’s not going to get done. Skillful management of your debt load is a primary requisite to avoid heading down the road to financial oblivion.
In debt management, knowledge is power. Knowing exactly what your debt load is on a periodic basis provides the foundation for taking control of those debts.
An old business slogan cautions, “You can’t manage it, if you can’t count it.” Nowhere is that more incisive than in debt management.
The job of calculating debts and liabilities may not be a fun exercise and it involves a bit of work, but it provides an essential dose of reality. Here is a reminder of some of the liabilities that your business may have:
Credit Card Debt:The almost universal use of credit cards nearly guarantees that credit card debt is a part of the total debt obligations of your business.
Other Charge Accounts:If you have any charge accounts with vendors, suppliers or other businesses, these outstanding balances must be included as part of your total liabilities.
Payroll Obligations:Unpaid payroll expenses, if any, are a part of total debt load.
Outstanding Loans:Until you list them on paper or in your computer, you may not realize how fast they add up. In this category are auto loans, mortgages, business renovation or expansion loans, inventory purchases on credit and the remaining balances on any other outstanding loans.
Outstanding Bills:Don’t forget those outstanding bills sitting in a drawer. This category includes unpaid workman’s compensation insurance, rent, business insurance, life insurance, medical insurance, auto insurance and outstanding rent and utility bills.
Unpaid Taxes:Among the easiest to forget when calculating total debts and liabilities are unpaid taxes. This includes not only federal and state income tax bills or estimates due, but also real estate, personal property taxes due in some states and city and other local taxes. Never forget that unpaid taxes run the risk of government intervention. Governments have the authority to seize your business assets, including bank accounts, and personal assets, such as your house or car.
All of these and any other debts that your business may have must be totaled to provide you with an exact picture of your debt load. Good accounting software is vital. Without it, or a computerized spreadsheet, the job of keeping track of your debts on a periodic basis may take more time than you’re willing to spend.
Once you have added up all of your outstanding debts and the status of each one, you’ll know whether your debts are under careful control or whether you have a debt load that is spiraling out of control.
If you run your business as a sole proprietor or partnership, keep in mind that you could be held personally liable for business debts, which could result in creditors trying to seize your assets. This is one reason for forming a corporation, which offers some protection against this possibility.
Take Control of Debt and SpendingWhether your debt load is heavier than you’d like or within reasonable limits, these tips will help you to take and keep control of your spending.
• Understand the Need for Debt ControlFailure to keep payments up-to-date on all debts can result in irreparable damage to your business. Even one court action by a creditor can result in unrest by your employees and possible limitations on your credit by suppliers.
Debt control is not a passive responsibility. It requires constant attention and action on your part.
• Credit Card DebtArguably, there is no more dramatic illustration of the destructive potential of unmanaged debt than today’s use of credit cards. Some credit card users will be drawn into the minimum-amount-due trap.
According to CreditCards.com, the average American household with at least one credit card had nearly $15,950 in credit-card debt in 2017. For many, the combination of high debt and high interest rates produces a perfect storm of unmanageable debt from which it will be extremely difficult to escape.
The lesson: The only rational way to use credit cards is to spend no more than you can pay off in full every month. To ignore that dictum is to place yourself squarely in the clutches of the credit card monster.
For any business saddled with credit card debt, strong debt management medicine is the only cure. Stop further credit card purchases and unnecessary spending entirely, and pay down the balances on credit cards that charge the highest interest rates first while paying at least the minimum due on all your other debt. Once you’ve paid off your highest interest debt, pay down the next highest and so on.
• Other DebtsDon’t borrow money against your home or your 401(k) to pay off existing business debts. What may seem like an easy solution could cause you to lose your home, your business or undermine your retirement plans.
• Beware of Debt ConsolidationAvoid the temptation of companies that offer to consolidate your debts into one easy-to-pay-off loan. In many cases, this will do nothing more than add another layer of debt. While there are reputable non-profit debt counseling agencies that may be able to consolidate debt and assist in better managing finances, there are also many disreputable agencies that are best avoided. Research carefully before taking this course to manage debt.
• Avoid Taking on New DebtUnless your debt load is manageable and under control, taking on new debt should be avoided unless absolutely necessary.
• Talk with CreditorsIf you are behind in any payments, contact the creditor and make sure he or she understands you are working to catch up. Most creditors will tend to be lenient with a debtor who keeps in touch and shows evidence of making a sincere effort to pay off the debt.
• Avoid Aged Payables of 60 Days or MorePayables of 60 days or more will almost certainly lower your credit score, which in turn, will limit your ability to borrow money and keep you from getting the best terms from suppliers and vendors. Make every possible effort to avoid any payable from aging 60 days or more.
• Prioritize DebtsRank your debts in the order you want to pay them off. If credit card debt is part of your debt load, paying it off first will usually be your best move. Credit cards often have the highest interest rates of all debts. Carrying that debt can be very costly.
• Always Know Where You StandMost experts agree that one of the most important tools for managing your debts is an exact knowledge of the amounts and types of those debts at all times. Good computerized software is essential for this task.
• Business vs Personal FinanceWhile there may be times when it may seem convenient to handle a business transaction with personal money, or vice versa, this is a serious mistake. Not only will it make it difficult to keep finances separate, but it will also make both your accountant and the IRS very unhappy. Don’t do it.
The Best Tool for Managing DebtsThe best way for managing debt is a conservative and disciplined approach to the use of credit before it becomes unmanageable.
These five tips will help to achieve that goal:
1. Start with a system designed to keep track of how much you owe at any given time and to whom.
2. Never fall into the trap of paying bills late. That is often the beginning of a downward spiral in debt responsibilities.
3. Never pay less than the minimum payment due. Paying only the minimum payment on bills exposes you to the often-oppressive interest rates charged by such creditors. Even worse is paying less than the minimum payment.
4. If possible, create an emergency fund set aside to fall back on in the case of an unexpected bill.
5. Create a computerized monthly bill payment calendar with reminders of dates due for regular repetitive bills.
Sometimes, debt loads seem to take on a life of their own. If, despite your best efforts, you find yourself in need of help in managing your debts, consider visiting the National Foundation for Credit Counseling at www.nfcc.org for in-depth, personalized financial counseling and education.