Thinking Entrepreneur
An owner’s dispatches from the front lines.
Breakups are never pretty. It was September 2008, and the economy, the stock market, real estate, and my business were all crashing (as did many businesses). Like an engineer figuring out how much oxygen is left in a mine tunnel after a collapse, I turned quickly to cash analysis.
Fortunately, it wasn’t too bad. Accounts payable were under control, there was plenty of inventory to live off, and there seemed to be enough cash to weather the storm — at least for a while. Then, after reading and watching the news for a few days, a little paranoia set in. It mixed with a little battle fatigue, actually 33 years of battle fatigue, and it produced a new mind-set.
This was about the fifth time I had been through the recession drill since I started the business in my parents’ basement. But this one was worse, and it brought a revelation that resulted in a new edict. I told myself that I was done with debt. I was breaking it off. I would go it alone in the future — no more bank loans, no more equipment leases, and certainly no more credit card balances.
Fortunately, I was already pretty close to debt free. My bank line was almost paid off, and I hadn’t carried a balance on a credit card for many years. This was really about setting some new rules for the future. I was very relieved that I hadn’t been carrying a lot of debt when the crisis struck, and I wanted to make sure that would be true the next time. I have come to expect a financial meltdown every eight or 10 years. Call it business cycles, call it adjustments, call it reality — a reality I had been slow to accept.
It is now three years later. I have made progress in realigning my business with all of the changes in the marketplace. Put much more attention and money into the Internet. Bought a bigger, more efficient and cheaper warehouse/factory building. Sought out and found many new vendors that offer products that are more interesting, better designed and better priced. Have been more strategic in avoiding commodity products and going after markets where we have stronger “core competencies.”
And it is working. Sales are up, expenses are down, profits are up, and I am hiring some new people. After three long years of playing defense, we are finally playing offense again. It has been possible to start playing offense in a slowly rebounding economy in part because of tax laws (section 179) that are meant to stimulate business, but this does raise a question: How smart is my now three-year-old edict against borrowing money?
If I borrowed some money, I could buy equipment that would lower my labor costs. I could overhaul my computer system, which would give me better information and operate more efficiently. There are improvements that could be made to my Web sites that should generate sales. And I still haven’t pulled the trigger on about 500 LED spotlights for my showrooms that will save about $18,000 a year in electricity costs. It’s all about return on investment. There would be a good R.O.I. on all of the items I mentioned even if I had to borrow money at normal interest rates. At today’s rates, the R.O.I. is even better.
The R.O.I. for borrowing money can be more effective and efficient than improving your R.O.W., a metric you probably have never heard of. It stands for return on work. You haven’t heard of it because I just made it up. But it’s what allowed me to get through the last three years and to reach the point where I can consider playing offense again. We have done it all with the idea of not borrowing any more money from the bank, except for a mortgage, and the hard work has allowed me to increase my bottom line and to hire more people. It felt right for a long time. But things have changed. Sometimes, an approach that seems conservative can turn out to be surprisingly risky.
So I have decided to rescind my edict, start dating debt again and make some new investments. This should improve my bottom line, which would get me past where I was when the recession started — assuming nothing happens, like Europe blowing up, to throw our economy back into crisis. That would, of course, significantly increase my R.O.S.N., or return of sleepless nights (yes, I made that up, too.) But I think can handle it. To be clear, I feel comfortable doing this for two important reasons: I am nowhere close to being highly leveraged, and I’m confident the money will have a very good R.O.I.
This may not make sense to those of you who are still swearing off debt (and for many people that remains a good policy, especially if they have nothing smart to do with the money). But saying debt is bad because of the recent meltdown is like saying fire is bad because of the Chicago fire. Used properly, fire is good — and so is debt. It can help build capacity, increase efficiency, increase quality and expand a business much faster.
Using it properly means not letting yourself get over-leveraged, even if the bank will allow you to borrow more. We already saw that movie. There is a big difference between borrowing money to invest in a business and borrowing money to gamble on a business — knowing the difference between the two is where the magic is. The government has helped give debt a bad name, but the words debt and crisis do not have to go together like soup and sandwich.
Debt has been my friend. It has helped me expand my business and provide livelihoods for more than 100 families. We are dating again. We just had a lovers’ quarrel.
Jay Goltz owns five small businesses in Chicago.
Article source: http://feeds.nytimes.com/click.phdo?i=98335ce66557d227a1da73935a0aab51
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