The easier credit becomes to use, the easier it is to abuse. Don't be one of the many profitable U.S. businesses that fail each year because of out-of-control spending.
I receive many requests to help shops manage their accounting and financial woes, and I review a large number of financial statements each year. No matter how hard I try, I am still unable to impress upon business owners the need for fiscal restraint. In other words, stop borrowing money to pay for your company losses or lack of cash.
The amount of debt that some small businesses are carrying is unconscionable. This heavy debt load is usually the result of financing years and years of negative cash flow.
Shop owners need to remember one very important point: You don’t spend profit. You spend cash. The net profit that you see at the bottom of your financial statement is not an indication of financial stability, just profitability. Financial stability is shown on your balance sheet as positive equity.
It’s not only about profit
You can show a profit every year but go out of business for lack of cash. Since 1990, more than 250,000 small businesses have failed. Surprisingly enough, more than 90 percent of them were “profitable.”
You may be thinking, “How is this possible?” The fact is that, despite their profitability, the shops were carrying so much debt, the owners ran out of cash to meet their obligations. When you run out of cash, you are out of business.
If you are in a negative equity position, you most likely have a negative cash flow. The only way to stop a negative cash flow position is to stop spending money or raise your prices. Spending money on long-term or short-term capital expenditures drains a business of the cash needed to operate. If those expenditures are not generating at least a 200 to 300 percent return, you should not have bought them.
Don’t misunderstand me. It is OK to consolidate debt, but under no circumstances should that debt be increased. If your debt is so large that you are finding it difficult to make the payments, you need to renegotiate all your loans.
When renegotiating, you need to stretch out the terms as long as possible to lower the amount of cash leaving the business. However, I do not recommend making interest-only payments. Having to make interest only payments is a warning sign of impending financial trouble. This is usually a futile attempt to stop the negative cash flow. By not making principal payments to pay down the debt all you are doing is stretching out the inevitable. Adding more debt at this point will eventually result in a total financial collapse.
Heed the taxman
There is a second type of debt that is even more destructive than overextended credit: overdue taxes. This debt is never forgiven and not even bankruptcy will absolve you from it. The most common types of overdue taxes I have seen are federal withholding, state withholding (where applicable) and state sales tax. In any type of foreclosure, these debts are always repaid first.
If you owe back taxes and try to consolidate your debt or renegotiate the terms of existing loans, lending institutions and creditors may be very turned off when they see this tax record. If you are unafraid of not paying the government, then what assurance will they have that you will pay them? You may find it near impossible to obtain a loan under those conditions.
If you find yourself in this situation, you need to take care of all the government taxes before refinancing your existing debt. Remember, every time you apply for a loan and are turned down, it affects your credit score. This, in turn, makes it even more difficult to borrow money.
Warning signs
The worst thing that you can do is wait for the government and your creditors to come to you complaining about lack of payment. If you see that you are going to default on your payments, you need to contact them before they contact you. Do not play hide-and-seek with your creditors.
There are plenty of warnings signs that things are financially amiss in your business: paying your bills late, losing discounts with your suppliers because you are not making timely payments, not making payroll or paying your taxes late. And finally, the number one red flag is not having enough money to pay yourself.
When these warning signs appear, you need to make a preemptive strike to resolve them. Sit down and add up all of your monthly obligations. Weigh them against your gross profit. Make sure that you include your own salary. If the gross profit is not adequate to offset all your expenses, and you are unable to raise your prices because of market conditions, the
only alternative is to reduce your expenses.
Identify controllable expenses
Certain expenses cannot be reduced, such as taxes, utilities and rent. But many other expenses can be controlled. Every business has some “fat” that can be trimmed. Closely re-evaluate all your expenses, including payroll, and then decide where to trim the excess.
If you find that you still are overcommitted for the gross profit generated, you need to talk to your creditors before you start making late payments. Thoroughly evaluate what you can afford to pay out each month before you sit down with them. However, do not sacrifice cash flow for the business; leave at least a 20 percent cushion.
Go in person
Visit each of your creditors personally, and state your position. You are probably asking, "Why in person?" It is very easy for someone to say no on the telephone, but much, much harder to say no in person. Remember the slogan, "You don't get what you deserve, you get what you negotiate." Once your creditors agree to the terms, honor your commitments to them.
Most creditors and even the government will work with you if you just keep them informed. Avoiding the government and your creditors only leads them to conclude that they must take legal action, which weakens your negotiating position.
If all else fails
If you find yourself overwhelmed with debt and don’t know what to do, find help. Professional resources, some even free of charge, are available through automotive associations, the Small Business Administration and private consultants. Don’t wait; contact someone. Most shop owners have worked very hard all their lives. It is a shame to watch their businesses crash down all around them
