An Excerpt from Ultimate Profit Management

Throughout the author’s career as a banker and business consultant, he has seen many examples of businesses that were doing just “fine.” They were profitable and growing slowly but surely, but then, the business owner decided that it wasn’t enough anymore to simply grow slowly. What was suddenly needed was growth of 20%, 50%, or even 100% per year, just like the notable companies they see and hear about every day in the media. They began to try to grow the business and in a short period, a profitable and thriving business became unprofitable. Since the business was no longer profitable, it needed to take on debt to pay its expenses. After taking on more and more debt, the business reached a point where it could not find any more debt to take on. This circumstance caused the business to fail to pay its bills anymore which led to a financial day of reckoning.

It doesn’t have to be this way. There is a more effective way to grow your business without causing it to become unprofitable. And that’s why the author wrote this book.

The following excerpt from the book provides a lesson to get you started.

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Grow With Less Debt, Not More Debt 

If managed carefully, debt can be your friend. If not, debt will become the enemy of your business. Do your best to use debt sparingly as you grow your business. 

Using debt is not immoral or illegal. We use it for mortgages, major purchases, tuition, and even incidental shopping. But the key is to undertake debt that you’re certain you can repay. Your monthly mortgage payments are accommodated in your cash flow (they had better be!). The same for car payments, or even restaurant meals. One of the great problems in these times is that using debt for college tuition was done without a reasonable certainty of paying it back. If you are a philosophy or European literature major, you’re probably not going to get a job after graduation that can easily pay back $300,000 of debt. You can go to a less expensive school, or change your major and focus on a different career. But you can’t incur $300,000 of debt if you know you’re going to be earning only $50,000 annually, unless you intend to live in your parents’ basement or rob a bank. 

What is the biggest problem with borrowing money? You have to pay it back! That’s an old joke I was taught when I worked as a corporate banker. There’s truth to it! 

We’ve all heard about people maxing out their credit cards to pay other credit cards each month. But debt entails interest (“vigorish” in the vernacular) and that keeps growing. Look at the required legal disclaimer on your credit card bills: If you make only the minimum payment per month on, say, $18,000, you’ll be paying it for 20 years and wind up paying $54,000 over that time period.  

That’s no way to stay fiscally prudent. 

Fiscal Finesse 

The idea is not to avoid debt, but to use it wisely and prudently with the intent of paying it off with a clear and short-term plan. 

People generally don’t pay off mortgages quickly, but they do accommodate the payments in their cash flow, can generally deduct the interest from their taxes, and own an appreciating asset through that investment.  

Your business is no different. Use debt wisely and judiciously in order to grow, but don’t allow it to use you. 

Another joke I was taught in banking: No one ever went out of business from having too much debt. It was the inability to service that debt that caused their demise. That’s like saying that it’s not the fall from a tall building that kills you, it’s the sudden stop! 

The key consideration about debt is that it has to be paid off, usually with interest and even penalties. A great many students thought the government was going to erase their student debt, but they were wrong. Even debt in a family that’s “forgiven” can create ill will and resentment. And that debt didn’t disappear, someone else paid it off. 

Borrow for the short-term, e.g., to hire a new salesperson who will be productive short term and enable you to quickly pay back the loan, or to improve your technology so that customers can order online faster and in greater quantities. 

Don’t borrow for ego or “show.” If customers don’t come to you, then you don’t need fancy offices, furniture, or artwork. (If you can afford these in the normal cash flow of a successful enterprise, fine.) Don’t borrow for “safety.” Even if you put the money in the bank “in case you need it,” you’re still paying interest on it and your credit score will reflect the outstanding debt, which could hurt your future borrowing and interest rates. 

Debt is often alluringly simple. Credit cards inform you of your cash available to borrow. Shady operations offer “instant credit” (often at confiscatory rates). Use debt proactively, not out of desperation. 

Finally, a banker will always lend you his umbrella when it is sunny outside. When you need a loan, they’re very hard to get. When you don’t need a loan, banks (and other financial institutions) line up with tantalizing offers.  

These jokes are actually lessons in disguise. You spend all of this time and endure all of this stress to build your business. Imagine that you end up losing your business because you made a mistake somewhere or something unexpected happened (see COVID-19) that caused you to default on your bank debt. 

The people and organizations which made it best through COVID were those which had cash. Assets didn’t have to be sold and loans didn’t have to be sought. There was hard cash, which went a long way. 

My father used to say, “Them that has, gets.” He meant that the more assets you have and the more wealth you accrue, the more assets you’ll acquire and the more your wealth will build. Risk management involves the careful parsing out of what you need for safety and what you need for growth. These are not antithetical, but rather synergistic. You grow best when you’re in a strong position, not when you have your hat in your hand in line at the bank. 

Use a portion of the profits that you earn to reinvest in your business for growth. Use a bank line of credit to finance the carry of your accounts receivable. That’s because, assuming you have good, solid clients who run their businesses as we recommend here that you run your business, they’re “good for the money.” You may find a family illness or natural disaster may delay the payments of an otherwise fine client. So, debt can be used to “finance” or carry income which isn’t available as expected, but is going to arrive somewhat late. 

[…] You want to minimize this as much as possible, but you still may find some customers delinquent. 

The take-away here is to use borrowed funds judiciously!

Excerpted from Ultimate Profit Management: Maximizing Profitability as You Grow Your Business (Productivity Press; 1st edition (June 19, 2024)