Weighed Down by Debt

from POND Trade Magazine July/August 2020

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share of the principal, so most of this money flowing out is pretty much ignored in terms of counting it as an expense.

So, What Do You Do?

The solution is really pretty simple. Stay out of debt! But in order to do that, your company needs to properly price your products and services to cover equipment depreciation and replacement in order to return a reasonable profit.

Depreciation is an accounting term that allows the company to write off a portion of the original purchase price of equipment, normally over a five-year period. This does not address equipment replacement costs down the road. For example, let's assume an existing truck will last the company three more years. When you trade it in, the new vehicle will cost you about $30,000. To avoid accumulating more debt, you should consider this $30,000 you’re going to need in three years and set aside $10,000 per year so that you can pay cash for it.

This sounds like the responsible thing to do, but as usual, there is a catch. Uncle Sam is going to tax you on this money you’re putting away, because it is considered profit.

So, you have to make sure you are earning a reasonable profit. Be sure to price your products and services with a proper net profit, from a cash flow perspective, not based on your P/L state- ment. In principle, a well-run company should generate at least a 12% net profit to cover future company growth and increased inventory. It also grows your accounts receivable and generates addi- tional cash to purchase new equipment and vehicles instead of taking out loans. This is the cornerstone of keeping your company out of deb t. a

Tom Grandy has more than 35 years of experience in industry and small business. He has worked as the general manager of a service company and is the founder of Grandy & Associates, a firm that holds seminars, two day workshops and one-on-one consulting for business training. Go to www.GrandyAssociates. com or call 800/432-7963.