Tackle Debt
Reason #7 for Implementing Profit First in 2024 - Tackle Debt
Debt can be a useful “tool” in business. Whether it be for business acquisition, a capital improvement or just start-up cash flow, financing can be used strategically to help your business grow.
How do you know when too much debt is “unhealthy”? From our viewpoint, every single business is unique and has potential to succeed. Often, however, debt becomes a slippery slope to lean on or get out of control quickly – especially in an unpredictable economy.
Today we are talking about how Profit First can help you tackle debt – for when you are committed to becoming cash flow positive and profitable for the long haul.
Business loan debt, credit card debt, student Loan debt, equipment financing equipment, etc – it’s all on the table for needing a PLAN.
If you want to intentionally pay off debt, you have to have a method (PLAN) to do so. You also need to have a profitable business – or the snowball will never stop growing. If you want to divert cash to any debts you may have, on the business or personal side, the best way to do that is to have a profitable, sustainable business! So let’s crunch those numbers!
It is crucial that as you start to generate more revenue, the tendency to spend the cash doesn’t creep back in. Tame it!!
In Profit First, we allocate funds to make your business profitable -- through a few different avenues. Reducing expenses, raising prices or revenue, and eliminating debt can all have a positive impact on cash flow. Plain and simple! Through a better understanding of your true costs of doing business, we can help you “lean” down your expenses to what is absolutely crucial and necessary so your profit margin becomes greater.
Don’t forget, as the owner of the business, you need to compensate yourself {regularly and fairly}, so as not to burn-out, lose focus, or justify additional spending if things are too tight on the personal side. A fair and regular compensation will allow stability in your personal life to also address excess debt and focus on the things that matter – like buying a home, saving for retirement or saying goodbye to credit card debt.
So how exactly does Profit First help you tackle debt? It all starts with an assessment. Tracking trends in revenue, expenses, profit margins and owner’s compensation – coupled with your liability (debt) profile will help us come up with a solid plan and timeline for diverting cash to debt elimination. We have a phrase around here – “if in doubt, open an account!”
The Profit First method is based on having separate and distinct bank accounts for the following purposes:
Income
Profit
Owner’s Pay
Tax
Operating Expenses
These accounts are funded based on percentages of revenue. It is very simple to add a “Debt” account to designate a percentage of every dollar of revenue to the goal of reducing additional debt. For example, an equipment loan payment would be drafted from Operating Expenses (OPEX), while an additional principal payment could be made from the “Debt” allocation. Alternatively, we could use a portion of the cash set aside for “Profit” to make additional debt payments.
Not all debt is “bad” – our viewpoint is that many successful and profitable businesses utilize debt as a tool to help their business succeed. When times are tough and cash is tight, a solid plan on how to use or lose debt is crucial.