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February 11, 2019

How to Avoid Business Debt

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Business debt is the one killer to a company’s bottom line, and you need to avoid it whenever possible. If you’re not careful, you can get in over your head and spend most of your profits trying to dig out from it.

Whenever I had a position of leadership in any organization, I always brought one simple rule with me: If I couldn’t afford it, I wouldn’t buy it.It’s a rule many business executives would do well to heed.

When I was the President and COO of Robroy, there was a point in our company when the cash we had was equal to our total annual revenue, which meant we could buy just about anything we needed without having to dip into private equity or alternative forms of credit. That means we didn’t need to be involved in business debt or do anything that could harm our cash position.

Another way you can avoid business debt is to ensure that you have a measurable return on every invested dollar you have in the business. A lot of businesses will invest in either equipment or systems, but not have a clear ability to measure the return on investment.

(This can be avoided if you measure your output and operations to begin with.)

And if a manager ever wanted to invest in a piece of equipment or a new system, the manager who was looking for it had to prove a minimum 15 percent return on investment for me to approve the expenditure.

That meant that before we spent the money, the manager had to have a clear understanding of how they were going to get a return on the money they spent. Then they had to prove this 3, 6, and 12 months after the project was complete, the system was installed, or whatever the case may be.

In other words, if you said you would spend $1 million and the project would take six months to complete, the first question I asked was, “did you do it within 6 months and within budget?” Then, we checked the results to see if you were on target to earn back the $150,000 you forecasted.

This way we then had a stake in the ground, a benchmark, to analyze why it might have taken longer or cost more or both. This evaluation would then tell you how you have to change your behavior to achieve the ROI you originally committed to.

The other thing the evaluation showed was that if our manager made a mistake and things weren’t going well, we knew we had to kill the project quickly, rather than throw good money after bad.

You can have a great idea that looks, smells, and tastes good, and you go ahead with it, because you think it’s going to work. Except as things get rolling, you find that it’s not as good an idea as you thought it was. That is the time to kill the thing before you permanently institutionalize stupidity and wasted money.

It’s my opinion that 50% of the reason a project fails is the people in the company, not the vendor. Which means that if it’s not meeting their requirements, it’s up to the company to kill it, because the vendor sure won’t. Too often, people think, “well, we spent all this money, we’d better keep doing it,” or they put off the day of reckoning, or worst of all, they never objectively measure their performance so they don’t know what’s working and what’s not.

Measuring results and requiring a 15 percent ROI was how I managed to ensure the company was never in business debt. While most companies have revolving lines of credit for working capital, I didn’t; we never needed it. We measured our objectives and performance, and we were able to create baselines so we could determine whether a new purchase was meeting our minimum ROI threshold.

Comments? You can contact me directly via my AdvisoryCloud profile.

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