#26: HOW TO DITCH DEBT AND GROW YOUR BUSINESS WITH CASH

This episode is a deep dive into paying off debt and growing your business with cash. I cover actionable steps you can take to get out of debt and fund your business with cash. Along with tactical advice, I touch on the mindset it takes to achieve it all. Tune in and discover what the 2 P’s are and how they can bring peace and confidence to your life and your entrepreneurial journey.

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Transcript

What's up my entrepreneurial friend Welcome back to financially Adjusted. If you're new to me, I am Leslie Roth and I'm here to bring you simple actionable knowledge for managing your money in your small business and your life. I run a bookkeeping business, and I am of course a numbers nerd so I am here to help you learn more about your small business finances and managing them and what that looks like. And how that can give you confidence and clarity when it comes to running your business.

My goal is to help as many entrepreneurs gain control when comes to their finances, and a huge huge part of being in control of your money, whether it's personal or business, is staying within your means and not leaning on debt. I recognize that some entrepreneurs are already in debt and I'm not here to shame you. That is not what this episode is about. I'd be a huge hypocrite, actually, if I shamed you for debt when I've had my own struggles with it in the past. Part of my story is a debt free journey with my husband that lasted a long time. We got out of over a hundred thousand dollars in debt. That journey and the challenges and turmoil it brought to my life is what has inspired me to grow my business debt free and encourage others to do the same thing.

Now if you've listened to my podcast for any length of time you've probably heard me discuss parameters for debt. Meaning what my recommendations are for debt limits in your business. And I recommend not taking on debt that's more than fifteen percent of your annual revenue and paying that off within a three-year time frame. Ideally the faster the better but this is the limit I suggest. I give parameters for debt because realistically debt is a part of the picture for a lot of people and if that's the case, I'd rather encourage you to be conscious of the debt and how much it is in relation to your revenue rather than not thinking about it at all.

Debt can be dangerous that way and I know from experience. It’s easy to disassociate from the totals and when you take on some debt you feel like it's not that big of a deal to take on more debt. And a lot of times we can get into that mindset where we think more about covering the payment and focus on that versus the big picture which is total debt to your total revenue.

That being said, I am still going to encourage you all day every day to run your life and your business debt free and paint you a picture of what that could look like.

Before I get into laying out how to grow your business with cash, I want to address how to pay off debt. If you're a business owner with debt, the first thing I recommend doing is throwing the shame and the embarrassment out the window. That is not going to serve you or move you forward in your goals and what's done is done. It doesn't help to dwell on mistakes. I'm here to offer solutions and help you focus on solutions.

What I will say though is that the one most important thing that you can do is to assess your behavior when it comes to money. Money Management is eighty percent behavior. I think maybe even more than that as far as I'm concerned. And I learned this the hard way. In my younger years I did that whole debt yoyo thing. I would rack up the debt pay some off then I'd rack up more debt. I was always just kind of back and forth in that cycle. And always been a numbers person and I've always loved doing a budget since I was maybe in middle school, but I was one of those people who would create a budget and go to great lengths you know and it would be detailed and beautiful in a spreadsheet. And then I would immediately go out and blow the budget.

I was being smart on paper and then my bad behavior took over. And it took me honestly until my early thirties to stop that cycle of debt It got less extreme over the years but until I was probably early thirties I would be in that that little cycle of debt. And I didn't get serious about paying things off and living within my means enough until, like early thirties. So, I am right there with you.

I had been listening to Dave Ramsey for years and years and all kinds of other financial podcasts because I just really enjoy the topic of finance, but until I was absolutely sick of being in that cycle my behavior stayed the same. So, I totally get how easy and how normal it can be to take on debt. But it does scare me how normal debt is in our society and how many people can fall into that trap just because nobody really makes a big deal out of it. It's pretty much the norm to be a person in debt. And I, along with many others, did the whole student loan thing and I signed on that dotted line when I was eighteen before I really even comprehended what that meant for me. So, I was kind of starting off on the wrong foot in life which I'm sure so many of you can relate to and still can after all these years.

But I don't tell you all of this to get on a debt soapbox. I really just want to tell my story, let you know that I get it, and if my story can help just one person it's worth telling and if you feel not so alone then it's worth it too.

Thankfully I am on the other side of it. I’m thankful I can say that and I get to experience how peaceful and amazing it can feel just to not be in that cycle anymore, personally or in business, and to experience that that peace. Especially in business.

Honestly, entrepreneurship is so hard. It is just really freaking hard and why work this hard to build something amazing just to give it away to a lender. I don't want that for myself, and I don't want that for you. I want as much of your profit as possible to go toward benefiting you, not the bank.

Let's talk some tactical steps for paying down debt.

The overview of the steps that I recommend taking is to first assess your debt. Second prioritize debt payoff and third create a repayment plan. Fourth is going to be considering debt consolidation or working with creditors but I will get into a little bit of detail on each one of those.

If you're someone who's not in debt and you're like ‘why am I listening to this podcast’, stick around because the last part of the podcast we’ll be talking about growing your business with cash and that is going to be really important. You don't want to miss that. So, you can fast forward a little bit if you need to but I'm going to talk about debt and how to pay it off because I think this is really the first step to success in your life and in your business and a launching pad for wealth building.

 So, the first part of paying down debt is to assess your entire debt situation. Take inventory of your debts on a spreadsheet or in a notebook (if you're old school). Document your lender, the balances, interest rate, and monthly payments. Side note - if you don't currently have a budget, it’s time to change that. You need a money plan in order to take a proactive strategic approach to your money and your debt payoff. In order to know how much you can pay off, you have to know what your margin is every month. My first podcast episode would help you with this as well as a YouTube tutorial so go back and listen to those. 

So, you want to assess your whole debt situation. Make sure you lay it all out and you know the full picture of what your debt is - the full extent.

Second, you are going to prioritize your debt payoff which is deciding which order you want to pay your debts in. There are two different methods for paying off debt which you might have heard of in the past because they're both very popular. The avalanche method and the snowball method.

The avalanche method is one that most math nerds like me enjoy because it's all about paying your debt off according to the highest interest rate first. With this method the idea is that you'll gain more financial traction because the higher interest rate payment would go away quicker. A con to this though is that if you have higher interest debt, if it's in a large sum and it takes longer, many people would feel mentally feel discouraged and lose momentum and focus because it seems like such a big mountain to climb.

And many would argue that for that reason the snowball method works better for mentally staying in it and just feeling encouraged because you pay off the smallest debt first and you feel those wins quicker which keeps you going.

But a con I think to this method is that if you have really high interest rates like say a twenty five percent interest rate on a credit card, those payments can stay higher for longer while you're paying off a lower interest rate debt. And it just depends on your specific scenario really. If you have like a high interest debt at a whole big sum then I think the avalanche method is going going to be better for you, because you don't want that sitting there while you're paying off a bunch of other things and that debt or that credit card interest or debt interest is accumulating at a higher rate. So in my opinion the avalanche method works better if that's the case like if those high interest debts are really big.

But really it's a personal choice and if one method or the other is going to propel you forward and help you stay in it then that's definitely the right one for you because it really does at the end of the day come down to behavior, and it depends on your specific scenario and how big that debt is.

Really, I think either method is good because you're intentionally paying it down, you just have to find that right one. For nerds like me watching that higher interest rate payments go down quicker with the avalanche method could actually fuel your debt payoff journey because you're more excited about that.

But on that flip side with a snowball method, you could feel like you're gaining way more traction if you're paying off a bunch of small debts and you keep getting those quick wins. So, definitely a personal decision.

Many financial educators including Dave Ramsey and many others encourage the snowball method but, you know, you can kind of gather up a lot of advice including mine and kind of make your own decision based on what works for you.

The key is just to get real with yourself about your behavior around your debt. Get that clear picture of what your debt is and take action to remedy it. Bottom line is if you're in debt you are absolutely capable of getting out of and pivoting to a debt free life and business and growing with cash.

However, a big part of the equation is getting real with yourself and taking a hard look at your behavior around money.

Okay, moving on.

Third piece of paying off debt is creating a repayment plan. And this is where you're heavily going to rely on that budget I spoke about earlier or money allocation plan as I like to call it. You'll lay out your money plan with all your income and expenses each month so that you know how much margin you have to allocate toward debt payoff. I recommend setting a timeline for when you'd like to have your debt paid off and then figure out what that means you have to pay each month. Like back out of that plan that and that goal you set. And once you break that down monthly, you'll see how realistic that is and if you want to alter your goal. You can also just see if fits into your current money plan and how you need to tweak it. If it doesn't fit, and you just don't have enough margin to barely pay your monthly bills, then you need to figure out if there's a way you can increase your revenue and cut other expenses to meet this goal of exceeding principal payments and just making the monthly payment because that's not going to get you any traction.

Doing this exercise is going to give you that realistic picture of what date debt payoff will look like for you and could really light a fire under your butt to take action.

Fourth and last is you are going to possibly need to consider debt consolidation or working with creditors. It depends on how much of a sticky situation you're in. If you have past due debts, I would say reach out to creditors if you haven't gone as far as things going to collections yet. Reach out to creditors see if they'll work with you. Depending on who the lender is, there could be a chance that they are willing to work with you on lowering rates or payments for a period of time to help you out.

If you have a lot of high interest credit cards or other debt, consider consolidating them into one.  If you have some kind of offer from a credit card with maybe a zero-balance transfer and you can lump a bunch of different credit cards into that, look into that. It's worth looking into.

But just a warning is that a lot of those have balance transfer fees so look at the fine print on those offers. And some are higher like five percent and sometimes even more than that. But you want to try to get one that's a good offer that maybe three percent of a balance transfer fee at a zero percent for maybe like at least a year and enough substantial time that you need to pay off that debt. So, make sure it's worth it to do that. 

A mindset shift is also necessary around debt. This is the last thing I'll mention around debt. It's very important to get out of the mentality of viewing debt as a crutch, like as your emergency plan. It can be a useful tool, but you shouldn't be relying on it for emergencies. I know for a time that could be necessary if you don't have any emergency fund and something comes up, but this can be a really vicious cycle that keeps you stuck, and I don't want that for you.

I think if you have healthy spending habits with credit cards, they can be a useful tool for paying expenses each month and helping you with cash flow management, and the rewards can be nice too. But be real with yourself. If your behaviors aren't in check, it could be a slippery slope and you need to really take a look at your behaviors and get real with yourself. If you are somebody that it’s too slippery of a slope, and you could easily fall back into getting into debt and not paying off your balances, I would say don't use credit cards as a tool. Don't use debt at all.

Okay, that is it for the debt talk. If you're feeling a little anxious or stressed around the topic of debt, just take a deep breath. Remind yourself that you can absolutely figure it out and this is not your permanent situation.

If you follow these tactical steps, you can get on the other side of debt, and it doesn't have to hold you back long term.

For this last part of today's podcast, I'll get to the nitty gritty of how to grow your business with cash.

First, I want to touch on the mindset that you need to be willing to adopt with growing your business with cash. Think of the two P’s when it comes to growing with cash and staying debt free - being patient and being a planner.

There's no doubt you can make this work your business and your personal life if you take on the mentality of a patient planner. When we are patient and willing to wait to purchase something until we have the cash to pay for it, we can remove debt from equation entirely. In order to get to the point where we have the cash we need to pay for things, it does require planning. Being proactive by having a monthly money plan that specifically allocates funds towards your long term goals is a total game changer.

You first have to figure out your business goals and the time frame you need to accumulate cash to fund that goal. Then from there you can back that into your monthly money allocation plan and this is going to be your roadmap to your goals. You may hit some bumps in the road because life just happens, and emergencies happen but having a proactive plan and being laser focused on funding those goals will be what gets you to them and makes them happen. You'll quickly be able to get back on track when you mapped out your plan, and you have that road map and that focus. The patience part has to go along with the plan part. There is no doubt that there will be times where you grow impatient and want to get to your goals faster and you just feel like it's going to take too long because we're human and we all struggle with this. But having a plan will help you with the patience factor.

Hear me out.

Your money plan will bring to light that reaching your goals is possible and give you a clear path to it. When we don't have a plan it's easier to get impatient and tell ourselves it's going to take forever, and we should just take the fast track to debt. And you know that's just going to help us get to where we want to go quicker. But we have to keep in mind that that fast track, using debt, I'm saying fast track in quotations but it's a podcast and you can't see that, but it could have severe consequences so that fast track is deceiving.

We have the idea that taking on going to propel us forward to our goals because we do it now but that's really an illusion. In reality, we end up with interest payments that deplete our profits, and that could have been money that went into your pocket or went back into growing your business, you actually end up stealing from your future self and the success you have is less sweet when you have to hand over your profits to a lender.

And when you're growing your business with cash it's especially important to have an emergency fund. This is key, and I know it can take some time to get there. I'm not glazing over that fact, but I do suggest that you work towards six months of operational expenses and what that would look like for you in an emergency. So, if you were to hit an emergency, let's think COVID, what would you need in your business to survive and how much funding would you need every month to keep things flowing the way you need to in order to sustain your business and keep it alive and you don't have to close the doors.

If you're working on getting out of debt, I recommend having at least one month of operational expenses. Ideally three. But one to three months of emergency funds and having that operational cushion is going to ensure that when those expenses come up unexpectedly, you are not relying on debt to cover them. And you're not slipping back into that cycle of debt.

It's also good to keep in check what you consider an emergency. So, a lot of people you build that emergency fund and you're like ‘oh I have that money sitting there and I really want to redecorate the office’ or you know take that trip for the conference and you need to definitely check yourself with this because that is going to be a slippery slope as well. Where you're just like oh just borrow from the emergency fund. No. The emergency fund is exactly as it’s stated. It's for emergencies so you set that aside and you pretend it doesn't exist.

So redecorating the office is definitely not an emergency. But a piece of equipment breaking down that hinders you from running your business proper is definitely considered an emergency.

Now, I say that but honestly if you have a piece of equipment on the fritz and you know it's on the fritz, you need to save and plan for that versus just waiting until it breaks down and considering it an emergency. Like every part of your business really should involve some kind of proactive plan. But things happen and sometimes, we just we just have unexpected things like that happen where something does break down. Naturally, we consider that expense more seriously because we know how hard we worked to save up that money So, if you're going to use your emergency fund for something, many times if you worked hard to that money saved, you are going to just naturally consider that expense more seriously. With debt it's easy to disassociate from the money we're spending because it's not ours and we can just quickly you know with the click of a button have that money at our fingertips.

Another thing that's super important is to have regular financial check-ins. In order to keep our fingers on the pulse of our business health and our money plan, we have to check-in frequently. I suggest that beyond just creating a monthly money plan you're revisiting that at least a few times a month to tweak things as you need to depending on what's happening in your business that month.

And I also suggest evaluating your expenses throughout the month via your budget and your P and L. The idea is that you're reconciling your proactive plan to the reality of what's going on in your business, which is what your P and L is capturing. Now, you do have to keep in mind that a P and L isn't capturing everything that's in the budget. Your budget captures all cash inflow all cash outflow, Your P and L is capturing all of your expenses except principal payments on loans and owners draws that you take out of your business, so you have to consider that when you're looking at your P and L. 

But when you're consistently revisiting your finances, you're staying up to date with the health of your business and it keeps you on track with your plans. Your money plan is your roadmap and it's there to guide you to your goals. If you ignore it and take your eyes off of it, you can stray off course.

Another tip I want to mention for growing your business with cash is what you do with that cash that you're saving and accumulating to put back into your business. 

So that it's working the best that it can for you, I highly recommend looking for a high yield savings account that you can park that money into. This includes your emergency fund as well as any other funds that you have going for growing your business with cash. You could have a specific fund outside of your emergency fund for if you're saving for a certain piece of equipment. You could have a separate fund for any traveling or educational expenses that you want to happen in the future. You could also have a fund that's just general reinvestment in your business. I think it's really helpful to have all of these different funds because then you have these different focuses and - side note - I do recommend Relay Bank. A lot of banks out there will only let you have couple of different like checking or savings accounts, but relay bank is awesome because they have multiple different ones and I've started using them for my business and recommend them.

 So, take a look at the show notes I do have a link in there. It’s an affiliate link so I do get a little bit of commission on that, but I'd be recommending that anyways honestly, so definitely check that out because I think it's really worth it to have these separate funds especially if you're growing your business with cash, it's helpful to stay on track with all the different areas that you're allocating your money.

And if you do have a six-month emergency fund when you park it into that high yield savings account, you're really going to see the interest accumulate over time and then that's just adding to your emergency fund which is such a win at the end of the day.

Alright, we covered a whole bunch in this episode and if you're feeling overwhelmed by it, remember you just need to take it one step at a time.

My goal with this episode today is that I've left you feeling hopeful for what your business can look like if you pay off debt and grow cash free. I think that when you're running a business it's very important to have a support group who will encourage you and share your journey It's also important to celebrate wins along the way and just have that supportive person or people by your side that will help you do that.

Entrepreneurship is not an easy journey and that's why it's so important to create peace in it where you can.

Some things we can't control in entrepreneurship, but we can control the cash that we save and not taking on debt. We can control these things. And we can make the journey a whole lot more peaceful and rewarding for ourselves by doing that.

As always, remember that action brings clarity, and imperfect action is than no action at all.

Have a great day friend!