If you have been in a business for a while and have employees...
chances are your business carry some amount of debt.
Your business is not an exception: the majority of established businesses carry some amount of debt.
You borrow money when times are tough in hope to repay once your business bounces back.
Thing is, business debt starts to accumulate as we go through ups and downs of the economy.
You spend increasingly larger sums of cash to make monthly payments.
At times it feels like you are in a slowly sinking boat that takes in water every time the stern tips into the water
Why is this happening?
The biggest issue is that the majority of businesses lack scalability.
Yes, that is what all these business gurus are telling us: Your business should be scalable so you can grow it!
But that is a one-sided representation of reality.
You should be able to scale your business down during tough times to avoid getting into a debt trap!
Easier said than done.
Yes, business scalability is a complicated subject.
Let me share with you a couple of rules of thumb my clients use to address most of the scalability related issues:
1.) Avoid long term business commitments if you can.
Long term leases and financial obligations are the number one reason business needs to borrow money during tough times.
It makes so much sense to save 10%-15% on a long term lease vs. going with short-term contracts or month-to-month.
However, you need to count in the cost of breaking a long term lease should your situation change (it always does) in the distant future...
And the cost of borrowing money to meet lease obligation in case you cannot walk away!
2.) There are no irreplaceable employees!
Unlike large corporations, small business owners are often reluctant to reduce the labour force during the downturns.
The arguments are the following: these are essential employees, they worked for me for xyz years and loyal to the business.
All these arguments are true.
Then ask yourself one question: Am I willing to mortgage out my future to buy somebody's perceived loyalty today?
Likely, you won't need to ask this question.
There are ways you can retain talent during the downturn without sacrificing your future.
3.) Scaling down doesn’t mean your business has failed!
It simply means you’ll need to readjust and move forward.
Your business will come out on the other side stronger.
Costa Shepin CPA