There’s a simple financial principle regarding the management of debt, that many small businesses don’t follow. It’s called the matching principle. It basically means that you should use long term money for long term assets and short term money for short term assets. A good example is your line of credit. Because this gets renewed every year or two, it’s considered short term debt. Using it to cover payroll until an expected customer payment arrives is appropriate. The point is, it gets paid back within a couple of weeks or months. This is not something that should carry a balance year after year.
Once I owned a retail business, and within the second year of business I used the heavy cash inflow from spring sales to pay for a new asphalt parking lot. This was a bad idea. Remember long term assets (like a new parking lot) should be funded with long term dollars, like a 3-5 year loan.
I was just looking over my garden this morning, excited to see the lettuce and radishes popping up. It made me think about the different seasons a business goes through. There is definetly a good time to plant (spend) and a good time to harvest (save), unfortunately most business don’t know about that schedule, or they don’t have the discipline to follow it.
Several years ago when the economy was really flying and almost all businesses were doing great, you should have been harvesting. That is to say, you should have been piling up all the excess cash you were making into a savings account. It was the wrong time to spend money. It was time to harvest. Think about it, was anyone willing to sell you anything at a discount 5-10 years ago? Home builders weren’t because they were too busy.
Now, with the sluggish economy, you should think about planting, or rather taking your excess money and buying up assets, spending on marketing, etc. Today everything is for sale at bargain prices because whoever has cash right now, gets to make the rules.