Debt

Financial Literacy for Business Owners

If you are a business owner you may already be financially literate, but just how strong is that literacy? Even if you are there are likely some things your CFO, Controller, or in-house accountant can do to improve your understanding of your financial situation. On the other hand if you aren’t financially literate then these same people should be helping you to become so. Read the rest of this entry »

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The Latest is Not Always the Greatest

We live in a time of constant change. As a result of this and effective marketing, some companies get people to buy things they don’t really need. What do I mean by that? Read the rest of this entry »

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Debt Can Kill Growth

It is very common for companies to go into debt to finance growth. Is that always a good idea?

Debt-A Financial Demon

Many a person has purchased something like furniture on credit. Now, there is nothing inherently wrong with that, especially if they have ample income to make the monthly payments. However, many learn some very important lessons they hopefully will never forget. Perhaps after three or four months of making payments they realize how they hate making those payments. Not only that, these payments can restrict what they can do as the payments cannot be avoided, at least if they want to build and maintain a good credit rating. They may even find that the furniture they bought no longer looks as good to them as it did. But, this is just on the personal level. When it comes to business, debt can kill growth for similar reasons.

Servicing Debt

Servicing debt means making the agreed to payments of interest and principle. If cash flow is adequate this may not be difficult. But, if the total obligations that a company has for expenditures of any kind becomes excessive then a cash crisis can easily develop. When that happens the company may be surviving day-to-day. It’s easy to see why debt can kill growth. Any time a company considers taking on additional debt they need to ask a few fundamental questions, such as:

  • Will the cash generated be sufficient to cover payment?
  • What is the payback time for the debt?
  • If the debt is for something like equipment, how long will it take before they recover the cost through additional sales and profit?
  • Is there an alternative?

One example of how timing is an issue has to do with depreciation. Perhaps equipment is purchased using a three year note payable. If this equipment is depreciation over say five years then the depreciation deduction is insufficient during those three years of note payments to offset them. In that case the additional sales or efficiency the equipment contributes needs to be sufficient.

Some Key Things to Monitor

If you do find that your company needs to go into debt, be sure to consider a few key ratios, such as debt-to-equity, debt leverage ratio and debt coverage (see Debt Coverage). Since debt can kill growth, be certain you can justify it. One other thing to keep in mind is that anytime your company has debt it opens the door to additional pressure from outside the company.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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Monthly Financial Checkup

Have you ever worked somewhere that always seemed to be financially in trouble? Were they surprised at this? If they were surprised then one of the main reasons could be that they were not sufficiently monitoring financial activity, specifically by performing a monthly financial checkup.

What Is a Monthly Financial Checkup

Before answering that question, let me ask one. Read the rest of this entry »

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A Financial Reckoning

Are your business finances in good shape or are you headed for a financial reckoning? As I observe the financial picture of our economy and in particular our government, I cannot help but wonder how long this way of operating can continue. Read the rest of this entry »

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Do You Really Need Debt?

How many small businesses with debt really need it? If you are a small business here are some things to consider.

A Faulty Assumption Perhaps

As I follow others thoughts I cannot help from but be surprised at how many think that in order to succeed in business they have to take on debt. What makes this interesting is that so many of these are start-ups or very young businesses. Reading between the lines, I have come to the conclusion that many have simply assumed they would have to borrow to start or Read the rest of this entry »

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Accounts Payable is Not Long-Term Debt

This will be a very short article. It is a follow up to Current or Long-Term Debt that discussed the appropriate use of various kinds of debt.

Accounts Payable

A comment made in a forum about accounts payable is what prompted this brief update on debt and how it is used. The commenter noted that a company was reclassifying some of its accounts payable to a note payable. When I heard this all kinds of bells and whistles went off. This is usually an indication of Read the rest of this entry »

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Understanding the Debt Ratio

Most of my recent postings have concerned how businesses are financed and how to measure the returns on those investments. Understanding the debt ratio will help you better understand the financing of a business.

What is the Debt Ratio?

The formula for calculating the debt ratio is:

Debt Ratio = Total Liabilities / Total Assets

(Note that this is expressed as a percentage)

Using a sample balance sheet from an earlier posting, let’s see that calculation. Read the rest of this entry »

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What is Debt Really?

Take a look at your company’s balance sheet and see if you identify everything that is debt. Is there anything hidden?

A Simple Example

Let’s consider the balance sheet below and see if we can form some conclusions.

what is debt

When we look at this balance sheet we could come to several conclusions. One, we might consider debt to be only Read the rest of this entry »

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What is Return on Capital Employed?

The return on capital employed is probably not a metric that many small companies calculate, but it can be very revealing about financial health. In some prior postings we looked at several ways of measuring a business’s return. Among those were return on assets and return on equity (see Two Measures of Financial Return). We also look at return a different way in the posting Debt Coverage. See those postings if you want to know more about these very useful measurements.

It is important to understand that there are two main sources of capital; one is Read the rest of this entry »

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