“If you know how to spend less than you get, you have the philosopher’s stone.” – Benjamin Franklin

One of the biggest things that we do at AcceleratingCFO is help companies plan their spending so that they can optimize an increasingly scarce resource – cash!  It is truly one of the biggest things that a company must manage to in order to maximize its fullest potential.

According to Nerdwallet.com: (as of March 2015)

• The rate of student loan debt in this country is increasing at an alarming rate, topping over $1.19 trillion dollars and impacting over 40 million Americans.
• The average level of credit card debt is $15,700.
• The average mortgage of the American family is $156,000.

These are attention grabbing numbers.  While we do acknowledge that debt is often a necessary means of funding to achieve your business and personal goals, it is important to watch the level of debt that you incur.  And when you are starting your own business and your cash flow coming in is not as healthy in the beginning, you need to take on some indebtedness to make your dream a reality. So what is the right amount of debt for you and do you ensure that you don’t take on too much at one timer (or over time)?

1. Don’t spend more than you collect.

As fundamental as this sounds, we have encountered too many people who look spend first and earn later.  There will be spending early on to develop your marketplace and get your name out there but this type of spending can be managed.  This will keep your spending down and focus more of your attention on cash collections.

2. Use your debit card not your credit card.

You need to be aware of your cash balance on a regular basis. One way to make sure you do this is to use your debit card because it immediately gets withdrawn from your account and forces you to make rational financial decisions. Do I really need to spend $800 on the latest Smartphone when payroll needs to be funded in two days?

3. Stress test your interest coverage.

We tell clients that if your monthly interest payment to all debtors (credit cards, rent, mortgage) is 30% of your cash inflows it is a red flag. You need to focus on reducing debt levels and future spending to get that percentage to 10% and below.

4. Keep your fixed costs to a minimum.

We emphasize to clients to not burden themselves with longer term liabilities until they have reliable cash flows that are predictable for at least three months. You should not hire employees, take office space or join country clubs without having the ability to weather slow periods of cash flow in your business.

Thanks for reading and keep smiling!

The Prophets of Profit