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Date: April 14, 2016
Author: Gina Calvert
Transitioning from Debt to Financial Health
As a Race Director or small business owner, there is obviously a lot of time spent on providing a good experience for your client; for R.D.’s that is the athlete. One aspect of running a company that can get lost on many business owners is the unwritten covenant there is to take also care of yourself, both health wise, as-well-as financially - these are intertwined.
Running a business is stressful! What causes some of the biggest stress on a business owner … how about managing your financial health? Your income vs. your expenses, including any debt you might need to run a business and ultimately pay off. We are naturally stressed by debt because it is an I.O.U., something we owe to another, and most are not comfortable with this situation over a long period of time, especially as we become seasoned. Sometimes debt leads to risky behavior, which can lead to making unwise or unstable business decisions that can negatively affect the business. It is almost impossible to run a business without debt, so what is the best approach to debt…think S.M.A.R.T.! Being SMART can lead you to a financially healthy business and a better income for yourself and your employees.
Here is an easy way to focus on, and remember good debt habits:
S = Satisfy dumb debt first; credit cards, high interest loans, unfavorable terms or tax treatment
M = Maturity matters; pay-off short term obligations first, or refinance if favorable
A = Accounts in good standing; keep them that way and continue to pay on time. For accounts in collection status, try to pay the minimum, but they are already affecting your credit score
R = Interest rates; pay-off the highest, keep the lowest, refinance where possible
T = Tax benefits; it itemizing, keep the liability who’s interest can be entered into the Schedule A
All businesses are unique relative to the amount of debt that they need to take on, and to be able to manage. Businesses in the entertainment world such as Six Flags or the Marriott properties will often sport astronomical debt ratios that are due to the nature of the capital requirements to own and develop properties. Other businesses like Starbucks will have much more “reasonable” levels of debt. You are all experts regarding your business and the needs of the business to attract and service athletes and clients in general, yet here are some desirable parameters to keep in mind about the debt you do have to make sure it does not become an unreasonable burden:
Debt Service Ratio: Annual debt payments divided by annual take home – shoot for less than 45%
This ratio is looking at the payments necessary to satisfy certain debt relative to the net income your business produces, or your take-home-pay, depending on how the business is financially constructed. For example, if annual take-home pay is $100,000, the annual debt payment for fences, trucks, watercraft, etc., is desirable when kept under $45,000. When payments exceed 50% of available free income, your stress-load can also increase substantially.
Debt-To-Asset Ratios: This is your total debt divided by your total assets – shoot for less than 50%
In this case, the ratio is instead comparing your total debt and divides it by all available assets. If, for example, all debt is $300,000, and total assets add up to $800,000, that equates to a ratio of 37.50%. In this example, your bank will appreciate it, and your own financial health will as well.
As Race Director’s (and product and service providers too), you are working hard to provide athletes a unique and satisfying experience. Remember that you also owe it to yourself to stay healthy so the athlete experience can be delivered year after year. By respecting the proper role that debt can have in allowing you to run and grow a profitable business, and adhering to basic debt management guidelines, you can minimize some of the stress of running a business and put that energy back into the enjoyment of the business, earning income, and life in general.
The best in financial health,
Financial Advisor, Certified Financial Planner™ Professional
The Burnham Group at Morgan Stanley
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