Debt: Good, Bad, or Just Plain Debt?ByRaymond D. Matkowsky
"Debt is a four letter word and means a four word sentence - Be Prepared for Trouble." - Louis Remmerswaal
"Every time you borrrow money, you're robbing your future self." - Nathan W. Morris
When you get in debt you become a slave." - Andrew Jackson
Is debt good or bad? Some people will say that debt that is taken on for productive reasons is "good debt." For the record, I do not believe there is any such thing as "good debt." There are degrees of "bad debt." Productive use is the lowest degree.
The three quotes above are so true when it comes to debt. Andrew Jackson said that you enslave yourself when you get into debt. When you are in debt, you owe a potion of your labor to someone else. That is enslavement. Even worse, depending on how much you borrow and under what terms, that person may have the power to tell you how to run your business.
Nathan Morris pointed out that every time you borrow money, you are robbing yourself. You are paying interest on that money. This is money that could be in your own pocket or show up as profit in your business.
Louis Remmerswaal said that debt means trouble. In the United States and most of the developed world a recession comes every four to six years. It is not a question of will it come but when. Do you want to be caught in debt when your sales plummet? Over the years, many companies have found themselves on such debt straits that they could not survive the downturn.
Most businesses must take on some debt to function. This is especially true for new startups. However, that doesn't mean that you must continue to do so as you grow. For example, say you borrow US$100,000 a year to finance your raw materials. At 6.0% interest you are paying US$6,000 out of your proceeds to cover the interest plus the original US$100,000. That is US$106,000 in total. If your finished goods give you a cash flow of US$200,000, then your profit is US$94,000.
Now set aside US$10,000 for next year's raw materials out of that profit. Next year you only have to borrow US$90,000. Your total payback for that year would be US$105,400. If your goods still returned US$200,000, you would have US$94,600 in profit. Not much of an increase, but now if you take that original US$10,000 and add another US$10,000 to it, you only need to borrow US$80,000 for that year. Now your interest is reduced to the point that your bottomline shows a profit of US$95,200 or a 1.3% gain. This is a substantial increase since it comes with no further increase in sales. With increasing sales you can compound your profits further. If you have more than one product, you can also do this for each product.
If after several years, you get completely out of debt and have no need for it, you have really reached the "pot of gold" at the end of the rainbow. It can be done. I have done it. You can now spend that "pot of gold" with a new found freedom.
Do you have any other suggestions, please share them with your fellow readers. Email me at rdm@datastats.com.
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