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It’s no big secret, but the economy is struggling, and so are a lot of businesses. I work with a number of companies on a daily basis, and without exception they are all looking for ways to manage better and make better use of the funds they have. One question that comes up regularly is how much debt is too much debt? The obvious answer is to eliminate or avoid all debt. The less debt you have, the better off you are.
In most cases, however, this just isn’t possible. So when no debt is not an option or a reality, I advise the companies I work with to follow a couple of simple guidelines when assessing the amount of debt they’re carrying:
1. What type of debt are you carrying? Is the debt a result of poor management and bad decision-making? Could it have been avoided with proper management and leadership? If the debt is a result of lavish spending for items such as luxury company cars, for example, it should be considered debt that absolutely could have been avoided.
2. Will the debt prevent you from securing investment money and growing the company? I invest in companies and know for a fact that investors do not want to give you more money so you can pay off old debt or put it towards paying high salaries for an executive or support staff. In most cases, if the debt you have is from paying salaries, you don’t stand a chance of getting additional funding.
3. Will the debt limit your ability to accelerate sales and increase the business through gross sales? The quickest way to eliminate debt is to sell your product or service. If all your time is spent dealing with the debt, however, and you’re unable to focus on sales, you stand no chance of reducing the debt and will forever be caught in the vicious cycle of managing debt.
While these guidelines might not apply to every situation, they do provide a solid foundation on which to assess the debt you’re carrying and can help you understand the financial health of your business.
T. Craig Bott
President and CEO
Grow Utah Ventures
Salt Lake City
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