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by Phil Latz

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Hi, welcome to this latest blog of my finance series that I hope will help you become more successful in your business.

As a business owner myself for many years, I understand the challenges that you face.

The theme of this series is how to maximise your profit.

This is the tenth and for now at least, the final blog in our maximising profit series. I’m going to revisit a subject that I’ve already briefly touched on in a couple of previous blogs, but that is so important that it deserves sole attention in its own blog.

That topic is debt.

I know this is a sensitive topic for many of you, so I’ll be treading carefully. But I also know that debt causes so much stress, not just for business people, but across our society. Because if this, it’s important that we confront this topic head on.

I’m going to discuss five aspects of debt:

1. Why we go into debt.
2. The difference between an asset and a liability
3. Good debt vs bad debt
4. How you can get out of bad debt.
5. And finally, offering credit for the products and services that you sell.

At a superficial level you could say that we usually go into debt when we purchase a product or service that we don’t have the cash to pay for.

But do we really need that product or service? Whether it’s a business purchase or a personal one, our human nature is the same. We crave instant gratification. It’s hard to wait and save up for something, especially when every day we’re bombarded with advertising from product sellers and huge financial institutions trying to persuade us succumb to our temptations.

Let me give you a classic personal example. If you visited this office you’d find two very common, basic vehicles parked outside, a Toyota Corolla hatchback and a Toyota Hilux Workmate ute. The car is mainly for our family transport plus occasional business trips and the ute is used for our property business.

We bought them both second hand, paying cash. They’re both now starting to look out of date compared to the latest models. In fact the car has just clicked over six years old and the Ute over 10 years old. Is it tempting to go out and buy new replacements?

Let’s be brutally honest here. Yes it is.

Why? Our current vehicles are very reliable and do everything that a new vehicle could do.

But when you pull up in the car park next to your friend, workmate, business associate or anyone else that you’d like to impress and they’ve got a bigger, fancier, shinier, newer vehicle it’s hard not to feel, well, perhaps a little inadequate.

You feel like you need to justify your decision.

But the reality is that many times the guy driving that brand new sporty Mercedes AMG is not actually wealthy, he just has a lot of debt – and bad debt at that, as we’ll see in a moment.

Now here’s my definition of assets and liabilities that you won’t find in any accounting textbooks. 

An asset is something that puts money in your pocket. A liability is everything else.

Flowing on from that, good debt is used to purchase and hold assets, bad debt is used to purchase and hold liabilities.

Now getting back to that Mercedes AMG, it’s going to depreciate even faster than it drives. It’s also going to cost a small fortune to insure, service and repair. So unless you’re in the motorsport business and it’s your tool of trade, I suggest it belongs in the liability column and any debt used to purchase and hold it is bad debt.

Don’t get me wrong, if you like sporty cars and you can afford to pay cash, then buy a garage full of them if you like. Just don’t consider them as assets. (I understand there are exceptions for certain rare, historic cars that appreciate in value over time, but I’m talking about the vast majority of instances.)

On the flipside, there are many examples of assets that you may purchase for your business, where I’d classify any debt you use to secure and hold them as good debt.

To list a few: your business premises, any equipment used to produce the goods or services that you sell.

Even the acquisition of another business, provided that it will put money into your pocket over time, that is, make a profit.

Let me share with you a personal confession. It took me years in business to figure all of this out, then years more to dig ourselves out of the bad debt hole we’d gradually created.

Back in the bad old days we had a substantial business overdraft, multiple credit cards, and a vehicle on finance.

We even tried debt factoring for a couple of years. This is when you borrow money at a high effective rate of interest, secured against your trade debtors list, something that I certainly would not recommend unless your alternatives are even worse.

So I know the past feeling of being in business with lots of bad debt compared to our more recent feeling of being in business with no overdraft, no credit cards, no vehicle finance, no-one hounding us to pay overdue accounts and no debt factoring. I can tell you without hesitation that the second scenario is less stressful!

We still have debt, but secured against real estate, which, because it earns rental income that exceeds all expenses, fits my definition of assets because it puts money into our pocket. Therefore the debt is good debt.

How do you get out of bad debt? A good place to start would be reading about the debt snowball method from author Dave Ramsey. For more specific business advice, read Profit First by Michael Michalowicz. I’m a big fan of this system and will be recording more about this later. In fact, we’ve become Profit First Professionals and at the time of writing this, we’re about four months into the training process to become fully accredited.

In terms of physical action, a good first step is to find your scissors and cut up every credit card that you have. Sure in today’s society we need plastic money, but you can replace credit cards with debit cards, that have all the same functionality but require you to maintain a positive account balance at all times.

We’ve exclusively been using debit cards for many years now and they work just fine.

Finally, what’s the morality of offering easy credit to your customers?

Given that I’m advocating not having consumer debt or even many forms of business debt, then feel free to call me a hypocrite. But I think we all have to take personal responsibility for our actions. 

Therefore I think it’s reasonable to allow our customers to decide if they want to pay cash or use any form of credit to complete their purchase of your goods or services. This of course means that they’re taking on debt.

They’re not watching/reading this blog, but you are. So please make sure that if you haven’t already, that you eliminate bad debt both from your business and your personal finances. You’ll sleep a lot easier when you do. And if you have any challenges with this journey, then please contact me for help. 

I believe that with passion, consistent effort and wise advice you can succeed in your business.

I wish you all the best and I’ll see you next time.

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Latest Blog Posts

by Phil Latz

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Hi, welcome to this latest blog in my finance series that I hope will help you become more successful in your business.

As a business owner myself for many years, I understand the challenges that you face.

The theme of this series is how to maximise your profit.

Today I’ll be sharing with you about why you should begin with the end in mind.

This is one of the seven habits in author Stephen Covey’s best selling book, The Seven Habits of Highly Effective people.

I won’t be reviewing what Stephen Covey has to say about this habit, but would certainly recommend that you read the book.

Instead I’m going to focus on specific business implications of beginning with the end in mind.

From a business owners’ perspective, the end, usually means either selling the business, handing it over to the next generation, or closing it down.

Over my decades in business media, I’ve seen so many examples of owners who do not end their businesses well.

For example one lady had a retail business that had been trading for about two decades, all within the same suburb and for years at its final premises.

As often happens, the owner had ‘had a gut full’ as she emotionally described it, with certain customers, staffing issues and so on.

Even though the business was not particularly large or financially strong, it still had assets such as stock, locational equity, exclusive territorial agencies for certain product brands and so on.

But rather than make any serious or sustained attempts to sell the business, she decided to simply shut the doors.

From an emotional perspective, this is understandable. She was tired and stressed. She just wanted to get out. But this can put a jaded view on the potential of the business. Remember that prospective buyers are keen, excited, full of energy and can see potential that the outgoing owner probably does not.

For many small business owners, particularly sole traders or partners who have not paid themselves a proper salary and superannuation, selling the business is their one chance to earn a lump sum, equivalent to a superannuation payout, from their business.

Without wanting to sound boastful, I’d like to give you two personal examples of when I’ve followed this principle and begun with the end in mind. The first of these we’ve already benefitted from. The second is a work in progress.

For 25 years my wife and I owned and ran a business that traded as Bicycling Australia. Over those years we created a wide range of products and events, some of which came and went, but when it came time to sell we essentially had three separate assets to sell, which in order from largest to smallest were, a magazine and web publishing business, a book publishing business and a mail order business. Ultimately, we sold these to three separate purchasers over the span of a couple of years.

Fortunately we’d begun with the end in mind. The assets were first created and always held within company structures. We’d spent a lot of money over the years securing all of our IP, that’s the intellectual property, such as trademarks.

Everything was well documented and we recruited expert assistance to guide us through the sale process.

Upon selling the business we were pleased to be able to take advantage of the very generous tax concessions that exist for small business owners who sell a business that they’ve run for a long time. The government also knows that this is small business owners’ best and possibly only chance to create a superannuation fund.

We’d purchased our business premises during our 25 year journey and we were happy to discover that it had more than doubled in value. We could take advantage of capital gains tax concessions for small business owners who sell their premises after primarily using it to run their own business for longer than a certain number of years.

A regular wage earner could reasonably argue that these tax concessions are unfair, because they’re not available to them.

But most business owners probably take a different point of view. They work much longer hours than their employees, often with most or all of their capital at risk, tied up in their business.

My second example relates to this business training series that as well as delivering in the blog format that you’re reading now, I’m also producing as a video series on a YouTube channel that we’ve created for this purpose. Before starting this series, I studied the basics of YouTube channels – what usually works and what doesn’t.

I learned that many people burn out after a few months. They get discouraged when they get so few views to start with, because rarely does success come within the first two years.

I also learned the importance of posting at regular intervals, the advantages of creating series, and of planning future topics well in advance.

With this in mind I created a plan of 14 series, totalling about 100 individual episodes.

If I hadn’t begun with the end in mind and mapped out my plan in advance, I might have joined the ranks of discouraged people who burn out before their channel builds a substantial audience. 

But even thought we haven’t yet reached come close to our audience goals, thanks to beginning with the end in mind, I’m still in there swinging, learning and hopefully improving as I go.

To sum up, make sure your business is at least ‘near sale ready’ at every moment of your journey.

You never know when health or family issues might arise that suddenly make it important to sell your business.

Selling your business should give you a unique chance to make a large lump sum with generous tax concessions.

Make sure you can cash in on what you’ve worked so hard to create and build!

I believe that with passion, consistent effort and wise advice you can succeed in your business.

I wish you all the best and I’ll see you next time.

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