The creation of a new debt free business is difficult and takes time. You have to start relatively very small and be prepared to take a longer period of time to reach your goals.
Another disadvantage is the possibility of seeing competitors much more quickly get market share and revenue by taking capital borrowed to finance their production and marketing efforts. Although the stages can be turned later in the way, at first, this can lead to discouraging thoughts and doubts about whether to continue debt free strategy.
Traditional companies who have incurred debt borrowed capital have a different set of challenges to make the change to become debt free. If the business owner is not very familiar with the finances of the company, doing so would be the first order of business. You will need to know where the money and the real profitability of the business, among other things is used. If the company is not using an operating budget, this will also need to be developed and put into play, being used as a strategic tool, along with a comprehensive management plan of cash flow. Diligence in doing so will be required as well as a total rethinking of the “way of doing business”; and if the company will reduce costs, manage cash flow and pay off existing debt will also be necessary.
Business owners may find this a very daunting prospect; but the evidence shows that during economic downturns, the lower the debt of a business, the greater the likelihood that the company survives. And as soon as the economy looks brighter, debt-free company will be in the strongest position to seize the best opportunities.
Five points to consider
Become a debt free company, or build a business from scratch is a long process. But there are some strategic points that should be appropriate if you plan to ensure success:
- You need to know – intimately – the true cost of delivering your service or product.
- It is absolutely clear that the money is invested.
- Develop and use an operating budget as a tool for decision making.
- Always know your current situation and financial condition – learn numbers and operate your business with this knowledge in mind.
- Consistently measure revenue, gross profit and available cash.
While there are no guarantees in life, the truth is that as the owner of an SME will sleep much better at night knowing that their business is stronger and safer operating debt free in these uncertain times.