Source: www.TurfMagazine.com
“Neither a borrower, or a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.”
—William Shakespeare, Hamlet“Creditors have better memories than debtors.”
—Benjamin Franklin
The offseason is the buying season for many of us. This winter looks to be a robust buying season. The message I heard from contractor friends at the GIE+EXPO is that the past two seasons were the best they’ve enjoyed since the 2008-2009 recession.
Many of us are budgeting for more sales and revenue for the upcoming season. (You prepared a budget, right?) Based on strong client retention rates and what we realistically expect to sell, we feel it is a good time to upgrade our service vehicles and production equipment. We’re reviewing our material and equipment needs in light of increased consumer demand. We’re expecting customer demand to keep growing.
Many of us rely upon lines of credit to buy equipment or to finance the growth of our companies. Indebtedness is a necessary part of business for many of us. To reach our next revenue plateau, we must purchase new service vehicles, mowers, compact equipment or enough turf fertilizer and other products to service the increased activity. Or, it might be that we are adding a new service or franchise opportunity to our companies. Maybe we need the cash to buy out a competitor.
We shouldn’t be afraid of debt if we have a good reason for borrowing. While there is no such thing as “good” debt, we can use debt in the same way that we lease an expensive piece of equipment to do a special big project. We use it to get the job done, then give it back (pay it back) with the agreed upon service charge (interest).
Ugly debt squared
Along with this acceptable debt, there is bad debt and ugly debt. Yes, ugly debt. You only have to be aware of what’s going on in Washington, D.C., to know what ugly debt looks like.
As I write this, our national debt is over $18 trillion, or about $58,000 per U.S. citizen or $157,000 per taxpayer, says USDebtClock.org. Other sources peg the national debt much higher thanks to unfunded liabilities such as Medicare and Social Security. The lowest estimate of what the government must come up with is $127 trillion to fulfill these and many other promises. If we ran our companies like this, we wouldn’t last a month.
The 2008-2009 recession caused many green industry companies to fail, including several regional multimillion-dollar operations. They ceased to exist because they ran out of cash. These businesses could not pay off their obligations and could not obtain more credit to stay in business.
Don’t get carried away
Were some of us guilty of “irrational exuberance” during the industry’s fat years? That might be too harsh a judgment considering the rapidity and severity of the 2008-2009 recession. Even so, too much debt caused these formerly thriving companies to close their doors.
Nobody can predict the future with certainty, but following a budget allows us to better gauge how much debt we can carry. Unfortunately, too few of us follow budgets when running our companies. This is irresponsible for many reasons. Running a business without a budget (a financial roadmap) makes it difficult to determine whether the debt we are incurring for new equipment and materials will increase our revenues and grow our companies. Because we do not have a budget we cannot gauge if that big loan we take out will, ultimately, cause us distress and our businesses to fail.
Bad debt is the debt we take out based on a hunch or a hope, debt without a solid plan to repay. Bad debt is borrowing to cover monthly expenses, such as rent and payroll. Finally, bad debt is borrowing on our personal credit cards and against personal assets. To that last point, you have incorporated your business, right?
Editor’s note: