Do you have an excellent business but still find yourself stressed because of high debts? This is a situation I encounter very often with many retailers. Many good businessmen have fallen prey to the trap of excessive debts due to their extravagant lifestyle. This is worse than not having any money at all; with some responsibility and control from the very beginning, one can easily avoid this situation.
Take the example of a store owner many years ago who earned an annual income of $100,000 — a huge amount for those times — but who was the worst when it came to paying debts. He lived the life of his dreams, complete with new luxury cars each year. Had he been debt-free, he could very well have enjoyed all of this with his income. But he didn’t establish himself properly in the early days of business; thus he was never able to climb out of the hole he dug himself. Eventually even his very good income couldn’t continue to service the extravagant lifestyle he had made for himself.
Society is rife with this “buy now and leave the consequences for later” attitude. Sadly, it stems from places you’d least expect. Recently, I heard of a school assignment where students were given the job of planning a monthlong holiday itinerary to four places in the world, including a budget for sightseeing and food. They were also asked to select a credit card that they would use for the trip, the rate of interest of the card, and the total cost of the vacation if it were to be paid off in five years. The implication was clear — enjoyment first, consequences to be dealt with later.
It can be dangerous to live this way. We are lucky to work in an industry where a large percentage of our debt is taken care of; at zero interest by our vendors. We are in a much better cash-flow position than industries that have to wait constantly for 90-day payment from their customers. Unfortunately, we don’t use this to our advantage and miss out on important opportunities.
We must not forget that each debt has to be paid — with due interest. Even vendors need to earn returns on memo inventory provided by them, and this often means higher prices when you eventually pay for the product, as compared to buying it outright.
So how do you make sure you are not spending beyond your means?
1. Make sure that the expenditure you are about to do is absolutely essential. As we mentioned recently, all expenses related to business must either reduce other expenditure (e.g. investing money in software that can save you the salary of someone doing things manually) or increase inflow of money (e.g. hiring a professional who will develop new strategies to boost sales higher than his own salary)
2. Keep a check on personal expenses. You need not live like a monk but you need to spend within certain limits. This is important to sustain your business. If you are frequently borrowing money to meet expenses, or see a perpetual upward trend in your credit card bills, you know it’s time to go back to the drawing board.
3. Look at refinancing. If it is possible to consolidate credit card bills and unsecured debt to a secured facility with a lower interest, then well and good, but beware! Often people replace credit card debt with secured loan to enable free credit card spending, but it results in greater long-term pain. Only if you are disciplined enough, should you take this step.
4. Before incurring more debt, think carefully. Is it important? Is there a way around it? Can I avoid this debt altogether?
The last few years have been tough financially. However, if we can sail through a period like this, the future holds more promise. Reconsider all your debts and expenses. Make sure you are well prepared to take your business ahead and use all the opportunities that come your way.