Rick's Business of Audiology Blog

Raising Cash vs Paying

Not that long ago a friend of mine asked me to talk to his son.

His son was about 22 and had just stopped going to school and managed to acquire a job.

His son was about to buy a brand new truck. My friend was hoping his son would keep driving the older car that was available at home.

What to do?

As I visited with his son I realized his son was confusing raising cash for the truck, with paying for the truck.

Debt, Cash and Opportunity

There is a saying in business: "You never go broke if you have cash."

There is another saying in business: "It takes money to make money."

There is the challenge clearly stated: You must have some cash to make more cash.

Most of our debt problems are not really problems with debt, but problems with the cash debt relationship.

Debt: Monthly Fixed Payments More Risky

If your cash flow changes from month to month, as it often does for owner operated small businesses, then watch out for fixed monthly payments.

Imagine a $10,000 debt with a fixed payment of $500 per month; and imagine the same $10,000 debt with no fixed monthly payment, or just a small monthly interest payment. Both must be paid in full at the same time. Which is more risky for the debtor?

The fixed payment loan is almost always far more risky. Why?

Debt: Friendly vs. Unfriendly

While listening to a client talk about some of his debt it occurred to me how much of his debt was unfriendly debt.

By unfriendly I mean from institutions with no interest in his success, his professional accomplishments, or anything other than finding ways to tack on additional charges to increase their short term profits.

Examples of this person's unfriendly debt:

Debt: Personal vs. Business

Please don't let the popular media mislead you.  All debt isn't bad!

Debt and Risk

Can you manage the risk? Every opportunity isn't for everyone.

What if I were to offer you the opportunity invest in a coin flip for $2 cash. If the coin comes up heads you will win $10; if tails you will win nothing.

You would probably immediately take me up on the offer. You could manage the $2 pocket money loss if it happens and $10 would be nice.

Now what if I were to offer you the opportunity to invest in a coin flip for $2,000 cash. If the coin comes up heads you will win $10,000; if tails you will win nothing.

Make the Bank the Debtor

Hate being the debtor all the time?

Deposit some cash. Become the lender. Make the bank your debtor.

It isn't all that difficult.

$1,000 isn't all that much, but it does mean you aren't always the debtor.

Yes, the little things do matter.

Rick

Debt: Match Payment to the Return

An often overlooked issue when considering debt is the ability to match the term of the debt to the ability to repay.

Let's say you have the opportunity to make a onetime investment on the first of the month of $25,000 with a 100% chance of getting $35,000 in return.

That is an opportunity we would all want to consider, if perhaps a bit unrealistic. It is simple for this discussion.

Why Debt is Helpful?

With all the popular media harping on the debt problem it is easy to forget that a lot of debt is really helpful; helpful both to the lender and debtor.

Why is debt helpful?

It is a way of transferring the use of something: in this case we most often think of cash but it can be almost anything, from one person to another.

Good Debt & Bad Debt

I got a bit of a giggle when someone I respect told me her definition of good debt was debt she could pay, and bad debt was the debt she could not pay. I understand where she is coming from. She has some she cannot pay, right now, and that is causing her immediate worry. It might spoil her weekend.

At a base immediate level this definition might seem to make sense. However as a business person this definition is seriously lacking. Why? Because this definition completely misses it's mark. Why debt is helpful to both debtor and creditor; and why it is not.

Debt is tremendously beneficial to our wellbeing, and our economy. However this applies to good debt. Bad debt is tremendously harmful.

Think of it like fire. Contained in our furnace fire is very beneficial to keep our homes warm. Uncontained it can easily destroy the home.