Recently, I talked about the three cycles that every business is organized around. These cycles – the Operating Cycle, the Asset Cycle, the Entity Cycle – contribute in different but complementary ways. One thing they have in common is each cycle has a specific role for debt.
For a business, credit or debt is not something to be avoided. Credit or debt is leverage.
As a business owner, you should think about debt differently than you do as a consumer. Business debt and personal debt are two very different things.
Consumers are taught to avoid debt at all costs. Benjamin Franklin lectures us, “Neither lender nor borrower be.” Even in our cartoons, the villain is an evil banker, trying to take away the family farm!
Our attitudes towards debt have evolved over time. Nowadays, we organize personal into good and bad debt the good debt, column includes the mortgage or a student loan. These are the kinds of debts that allow you to grow your assets. Bad debt includes credit cards and the like.
In your business, if you manage debt the right way, all of your business’s debt should be considered good debt.
Remember, your business is an investment. The way that you increase your return on your equity is through leverage, also known as debt. Your business takes on debt to expand its activities, leading to greater profits, and putting more money in your pocket at the end of the day.
Debt is a tool; like any tool or piece of equipment, you need to learn how to operate it properly for the best results. When you do, it allows you to get more work done in a more efficient manner.
As a business owner, it’s important to have the right mindset on how to use debt accurately. In upcoming posts, I talk about this topic in greater detail.