The final item on our list of things contractors can do to assure positive cash flow is to avoid debt. If you are in debt, set the goal of becoming debt-free.
It is so easy to gather some bills and start a small debt load. What we normally see is credit card debt or maybe a bill with suppliers or subcontractors. At some point the $1,500 to $2,000 you owe at the end of the month becomes $4,500 to $5,000 or even a little more. After a few months, you get comfortable with that and then up it goes again.
Your debt ceiling is a moving target, so each month the debt gets a little deeper, a little more spread out and you always seem to find a way to rationalize that big bill hanging over your head. I have had guys tell me, “No big deal, I can pay that off in a month.” The problem is that all too often, “I want, I want” gets in the way of paying the bills and before you know it you owe over $100,000.
You are charged interest on the money you owe. Paying interest means less cash available to you for your business. When business gets tough, the interest expenses keep right on marching. You have an overhead expense you can’t reduce and you can’t control. Those nickels and dimes add up and can wipe out any profits you might make.
The average debt load of the companies who’ve come to us for help over the last 11 years is about $125,000. The debt load got that large one bill at a time, one month at a time. Now, if you don’t get that bill paid down, you are paying something over $800 every month just on interest alone. That is roughly $10,000 a year that you might as well flush down the toilet.
The worst part of being in debt is that like taxes, it’s a distraction. You feel comfortable with the debt, but like a bad tooth it’s always there, nagging at you. What do most people do in a case like this? That’s right, they ignore it and hope it will go away.
If you’re in debt, pay it off. No toys, no nothing. You should never have both interest expense and entertainment expense on your P&L. Business is difficult enough without the albatross of debt hanging around your neck.
Sometimes a planned investment will put you in debt and that may be okay, but, and this is a big but, you need to have a well-thought out schedule to pay off that debt before the debt is taken on.
It takes discipline to stay out of debt. It takes more discipline to get out of debt.