Financing – Is It Really Worth It?
Don't get me wrong, I understand that not every business has the luxury of avoiding outside financing. And sure, maybe you could accelerate your 10-year plan to five years. Ultimately, however, you must evaluate whether debt is really worth it to you (e.g. personal guarantees, debt covenants, interest costs). In my opinion, there are only a few reasons to incur debt. These include:
- Working capital: Financing used to help manage the Cash Conversion Cycle (or Cash-to-Cash Cycle). This is financing the purchase of a widget today for the ability to sell it at a later date (hopefully for a profit). The proceeds from these sales should be used to pay off the corresponding debt.
- Income-producing furniture, equipment, building and land: Essentially, anything you need in your business to make money. Income-producing means it will either increase revenue or decrease cost. The income generated from these purchases should be used to pay down the debt in a reasonable amount of time.
- Income-producing acquisitions: Identifying situations where 1+1=3. When done properly, acquisitions should earn additional income through the elimination of redundant headcount/overhead, cross-selling product/services, etc. Again, the income benefit generated from the acquisition should be used to pay down the debt in a reasonable amount of time.
