Wednesday
Oct222008
Debt and financial statements
Wednesday, October 22, 2008 at 1:59PM
We're being asked by a lot of clients if they should take on debt to weather the economic storm. Usually the answer is no. Debt is not a substitute for profits. And when you don't know what the score is debt can be deadly. This is an email response to a client who has been holding off on hiring us to prepare financial statements because money is tight. I think it holds lessons for everyone (myself included) on the importance of good financial reporting and the harm debt can do if not properly managed. This client really has a great business, but any business can be crippled by debt too easily.
Dear Client.
Patty forwarded your email to me. As a business owner let me assure you there are plenty of “screw the whole thing” days ahead of you. The good news is that they should decrease in frequency. For what it’s worth I’ll give you my two cents on two topics you are dealing with at the moment.
First, I understand the cost/benefit thinking so don’t worry if you decide Axiom isn’t the best fit for producing financials. I think it is, but I’m biased. The bottom line is you MUST HAVE monthly financial reporting whether produced by Axiom or someone else. Without it you will be making decisions that aren’t based on anything but your emotions. In the absence of information our recollection of facts, figures and logic is based on how we feel. You need good feedback on where the business has been and is so you can know where it is going. Financial reporting does just that.
Second, don’t take on anymore debt. We don’t have a plan for the debt, it’s not in any budget that we’ve produced, and we don’t know how we are going to repay it. During our last meeting you laid out the basic economics for your business model and they pointed to high margins and relatively low overhead. If the business needs more cash it’s because the basics of that model are wrong or because something is broken. Accurate financial statements will help diagnose the problem so you need those quickly. In the mean time debt is not going to fix anything. In fact it will just make cash flow worse and narrow the long term options for the business. I think I’m preaching to the choir on this one, but I’m doing so because I want to reinforce a belief in you that I think is a healthy one. Debt is no substitute for profits so unless we can figure out a way to feed profits into the bank account we should stop borrowing money. It will make your life so much easier down the road, and it will GUARANTEE that there are fewer “screw the whole thing” days ahead of you.
Dear Client.
Patty forwarded your email to me. As a business owner let me assure you there are plenty of “screw the whole thing” days ahead of you. The good news is that they should decrease in frequency. For what it’s worth I’ll give you my two cents on two topics you are dealing with at the moment.
First, I understand the cost/benefit thinking so don’t worry if you decide Axiom isn’t the best fit for producing financials. I think it is, but I’m biased. The bottom line is you MUST HAVE monthly financial reporting whether produced by Axiom or someone else. Without it you will be making decisions that aren’t based on anything but your emotions. In the absence of information our recollection of facts, figures and logic is based on how we feel. You need good feedback on where the business has been and is so you can know where it is going. Financial reporting does just that.
Second, don’t take on anymore debt. We don’t have a plan for the debt, it’s not in any budget that we’ve produced, and we don’t know how we are going to repay it. During our last meeting you laid out the basic economics for your business model and they pointed to high margins and relatively low overhead. If the business needs more cash it’s because the basics of that model are wrong or because something is broken. Accurate financial statements will help diagnose the problem so you need those quickly. In the mean time debt is not going to fix anything. In fact it will just make cash flow worse and narrow the long term options for the business. I think I’m preaching to the choir on this one, but I’m doing so because I want to reinforce a belief in you that I think is a healthy one. Debt is no substitute for profits so unless we can figure out a way to feed profits into the bank account we should stop borrowing money. It will make your life so much easier down the road, and it will GUARANTEE that there are fewer “screw the whole thing” days ahead of you.
Reader Comments