In one of my earlier posts (The Blessing in “No”) I talked about my struggles last year trying to grow my business and despite all my efforts seeing our client work slowing down. One of the reasons I was able to successfully make it through that challenging period was because early on in my business I made a key decision. This decision not only got me through last year, but other lean years as well. In fact, it has become a cornerstone of how I run my business. If you are in business or considering launching a business I would strongly encourage you to make this decision too. What is it?
Simply, operating my business debt free.
Now, before you dismiss this, hear me out.
1. The $100 Start-Up – Many people incorrectly believe you need lots of capital to start a business but that’s simply not true. I started my consulting firm with less than $200. In his book The $100 Start-Up, Chris Guillebeau, outlines that most entrepreneurs started their business with less than $1000 and half did so with less than $100. (Here’s the Forbes article) You do not need to go into debt to start a business.
2. Cash Flow – Want to know the number one reason why businesses fail? It’s not a lack of sales; it’s cash flow – or the lack there of. You can have lots of sales and revenue, but if it’s all going back out in the form of payments on credit cards or bank loans, you are in trouble. This becomes even more true when you start looking at the ebbs and flows of your revenue during your start-up, the terms you negotiate with your clients and vendors, and the terms with your lenders. If you need to pay your lenders every 30 days, but your client’s policy is to pay Net45, in a few short months or quarters you could quickly be out of business.
3. Retained Earnings – The advantage of operating a business debt free is you are able to designate funds as retained earnings. Retained earnings can be used to reinvest into your business to fund future growth or expansion; but they can also be used as your emergency fund. In my consulting firm we keep four months of operating expenses in retained earnings at all times. This is how we were able to make payroll and invest in a new product line during a time when our revenues were down.
4. Keeping Personal and Business Finances Separate – A cardinal rule of running a business is keeping your personal finances separate from your business finances. If you operate your business debt free, you are less likely to have to draw from personal expenses to pay your lenders. Conversely, you’re not taking out personal loans and putting your family at risk for a business that may or may not succeed. (I personally know people who did this and had their home foreclosed on, please do not do this.)
5. Competitive Advantage – Over the years, I have watched other consultants and firms we competed against go out of business because when times got tough, they didn’t have the financial resources to stay in business and had to go find a job. We also don’t feel pressured to take an engagement just to be able to cover expenses. Since we can choose whom we want to work with we have more successful engagements. This definitely gives us a competitive edge over other firms.
The one downside (if you can call it that) to operating a business debt free is that you may have to grow a little slower. However, as a Naptime CEO, that doesn’t bother me. In fact, I think that by growing slower, we are a stronger firm because we don’t make rash decisions simply to achieve short-term gains.
What do you think? Do you agree or disagree?