Byron Moore, CFP® and Mike Jones

Cash is oxygen

By Byron Moore, posted October 9, 2017
Originally published in the News Star and the Shreveport Times on Sunday, October 8, 2017.
 

drowning_sm.jpgQ: I was always taught to pay my bills on time and avoid debt like the plague. As a business owner I try to practice these values. When I started my own business, I took out a large loan amortized over 15 years, but I am trying to pay it down as fast as I can – maybe a soon as five years. The business is profitable, but sometimes the rate at which I am paying down debt can create cash flow issues for me. What’s the balance?

A: How long could you last without oxygen? When it comes to breathing, do you think in terms of balance or unlimited access?

In business, cash is oxygen. Other than that, it’s no big deal.

Many people tell me they are paying down debt at some accelerated rate and expect me to pat them on the back as if they’ve done something really good. In most cases, I ask that person why they are paying down the debt so fast.

“So I don’t have to pay all that interest!” is the answer I usually get.

When I hear that, I can be pretty sure I am talking to someone who is thinking in ideal terms.

Ideally, business would be steady and growing, you’d never get sick or die, no one would ever sue the company, a competitor with deep pockets and no scruples would never open up shop nearby and your place of business would never burn to the ground.

That would be ideal.

And in an ideal world, it is better to pay off debt early when the interest you are paying on the debt is higher than the interest you are earning on your savings. Simple math, right?

But occasionally, life and business are not ideal. They can get real. Very, very real.

Suppose something ugly happens? Just to pick an example, let’s suppose a new competitor enters your market and disrupts your business. Your revenues are way down and in order to once again become competitive, you’ll have to invest in new equipment sooner than you’d expected.  

Of course, all this doesn’t happen overnight. Your revenues have been steadily falling for months before you wake up to the fact this is a real problem. By this time, you are actually losing money.

You know you can right the ship, but it’s going to take time and you’ll have to make an investment in new equipment to do it.

But when you approach your banker about a new loan, you discover they are in a different mood than they were a few years earlier. They know your business is losing money and they are concerned about lending you more money you might not be able to pay back.

You had gone to the bank to discuss restructuring your existing payments and securing an additional loan. You left with a loan request rejection and a stern warning about the consequences of missing a payment on your current loan.

Most businesses that go under do so not because they can’t pay off their loans, or because they paid too much interest on a loan.

They go under because something unexpected happened and they didn’t have enough cash reserves to weather the storm. All they needed was just a little more time…a little more cash…but the clock ran out and they lost everything.

Unless you have a ridiculous amount of cash (and I’ll let you define that), I would advise most business owners to hang on to their cash as long as they can and pay off their debts (that have reasonable interest rates) at the agreed upon rate and not a day sooner.

You can drown in six inches of water just as surely as you can drown in sixty feet of it. If you’re under water, the thing you need to live is out of reach for you.

Remember, cash is oxygen. Treat it like the life sustaining commodity it is.

 

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