Navigating small business debt

Starting a new business often means dealing with debt, but fear not, our trusty bookkeeper mensch, Paul Rosenblum, is here to guide you through the labyrinth of Accounts Payable. It may not sound thrilling at first, but when you step into Paul's world of bookkeeping tales, you'll be in for a wild ride. Get ready to be amazed (or maybe shocked) by the financial antics of small business owners as they navigate the treacherous waters of credit cards and loans. And, of course, Paul will serve up some sage advice to steer you in the right direction because he's got your back!

Transcript

Payables, Payables and More Payables

Hello, and welcome to another episode of the podcast. I’m Paul Rosenblum. 

In response to a request from a listener, today I’m going to focus on Accounts Payable. 

We all have our own version of Accounts Payable in our personal lives. If you have a credit card of any kind or a car loan, or a mortgage on a house or apartment, you are stuck with accounts payable. How do you personally handle your own debt? (And you can answer that after you hear this entire episode) 

Most businesses have debt. There’s an old saying in business -- “You have to borrow money to make money”.  But the trick is how to do that carefully and how do you build the debt into making a profit for every job that you do? There are interest rates or finance charges that you have to deal with, and of course there is cash flow to help you figure out how much money should be coming in and should be going out based on due dates in your accounting system. Do you borrow money just to fund a particular job that you are about to sign a contract with?  

There are actually two kinds of Accounts Payable. Vendor bills such as rent, subcontractors, leases on equipment, and any other actual ‘bill’ that comes into your business, and the other kind of payable is ‘Credit Card Payables’ (a slight bookkeeping difference).  Let’s talk about startup expenses and credit card debt first. 

I’ve put together a small list of things to think about: 

1. When you start a business from the very beginning, usually the money in ‘Startup expenses’ comes from the owner(s) of the company that may not even exist yet. Even though there is no timeframe in paying yourself back, this can be looked at as debt belonging to a company that has really no definite timeframe to pay it back.  Once the entity is made (LLC or Corporation), the amount of personal money spent on the company can be entered into the owners’ equity accounts of the company and entered in as ‘Startup Expenses’ (an “Other Asset” into the company’s books. (There are exceptions on the equity part, but that’s another episode). This one is the easiest one to deal with in terms of debt. (More on ‘Startup Expenses” in the very first episode of this series.
2. If you have the kind of a company which needs to purchase equipment even before you open such a medical office, and you can’t lease the equipment on a monthly basis, this can be a lot of money that has to be either put on credit cards or would involve taking out a loan from a bank or in some cases, a ‘funding’ company if a loan from a bank isn’t possible since the company is new and doesn’t have a credit rating yet. In some cases, you could take out a personal loan, and ‘lend’ it to the company, but that loan would have to be paid monthly back to the bank from your personal account, hopefully funded by the company after it starts making money.  Let’s talk about a few examples of clients of mine in debt situations: 
3. One client started their business in 2015 and borrowed about a million dollars for the buildout, with a projected opening date of June.  They weren’t able to open until August, so before they opened, they had to start paying the loan back at over $7,000.00 a month which was not part of the original plan. So, by the time they opened, they were already financially behind.  Since the business didn’t take off the first day, they had to spend a lot of money using credit cards just to stay in business.  At one point, they had 7 credit cards all with high balances owed with at least 17% finance charges connected to each one. They were making minimum payments, so with the interest rate, the balances were staying the same or maybe going down just a tiny bit, even if they didn’t use the cards (which was rare). They took out loans from ‘funding companies’ or ‘Rapid Advances’ to get them through the lean months, just to pay bills and keep themselves in business. These ‘funding’ companies automatically take daily payments out of your business bank account at around (when it’s all said and done) 21% interest (of the total funding). And of course, the pandemic started 4 ½ years later, and they hadn’t paid down any of the original debt, and they were really struggling. They were able to get grants and PPP (forgiven loans), and other more specialized grants for their particular business.  I took a really deep look at their books in the middle of 2022 to come up with a plan to pay down the debt and made these suggestions. 
4. Call the credit cards companies and see which ones could lower interest rates based on their (hopefully) on-time payments. If they say no, call again in 2 months and keep at it until they are able to lower interest rates.
   1. 1. Apply for credit cards that have a promotional rate of 0% interest and then move as much of the balances as possible to a no-interest credit card. Pay that balance off and then move more debt from the other credit cards into the no-interest credit card. And keep going until that 0% interest expires.
      2. Close as many credit cards as possible, even though they have balances. This way, they weren’t able to charge any more on those credit cards – they would be able to just concentrate on paying them off.  
      3. Break down the sales and expenses into daily numbers. I suggested that, because I did that, and there were many days a month that they were making less money than they were spending. There were days that they paid the entertainment talent, the extra security, the social media, extra payroll, etc. more money than they were taking in. 
      4. I suggested that they go through the COGS very carefully.  Only purchase what you know you will sell quickly.  You can always replenish if you run out of stock.

The owners came up with excuses for how they couldn’t do what I suggested, and they are still suffering financially today. In a company that has a lot of leases, and no COGS, for one example, one has to look at the value of those leases. Do you really need every piece of machinery that you have? Can you go with another model which might be cheaper until sales increase?  Another philosophy with credit card debt is to go through all the credit cards and concentrate on the interest or finance charge rates.  Making minimum payments on all the credit cards monthly but making as high a payment as you can on the one credit card with the highest interest rate will reduce the debt on the high interest credit card, hence lowering the amount of interest monthly, (not necessarily) the rate of interest. Always be looking for promotions from other credit cards companies where you can save on the interest rate for a period of time.  This will help as well. If you are serious about paying off the credit card debt, don’t use the credit cards for a few months if at all possible. Use the money in the bank account. Pay the high interest credit card the highest amount that you can monthly, and minimum payments on the others.  OR -- you can make the highest payment on the credit card that you owe the most amount of money to (even though the interest rate might be lower than some others) – as you pay that down, even though the interest rate is high, the debt goes down and the actual amount of interest goes down as well.  You can also try and get a credit line at your bank and borrow against that to make large payments and bring the credit card debt down. Obviously, it doesn’t help overall debt, BUT -- remember, the credit card finance charges are computed monthly, but the credit line interest is computed daily. If you take out $20,000 from a credit line account and pay it back 5 days later from sales, you only get charged 5 days of interest, unlike a credit card, you’d get charged 30 days of interest when you get the statement.  It’s more work, and a lot of transferring from your checking to your credit line and back out again (could almost be every other day), but that’s one way of saving money in the long run. However, sometimes, it just comes down to SALES. One has to make enough money in sales to support the business. You don’t want to live off of credit cards and credit lines and loans forever. The goal is to make businesses self-supporting. 

1. I have another client who is losing money every year, even though they have about 4 million dollars in sales.  The COGS against the sales (or revenue) are good numbers, but they use the credit card for everything. Company expenses as well as personal expenses. The company pays for all expenses on the credit card. One year It ended up being around $100,000.00 of personal expenses that the company paid for that were put on the credit card.  There were also many trips which I was told were business trips. These trips included airfare, checking baggage at airports, hotels, rental cars, gas, and food.  Are the sales that they are making when traveling really paying for the subcontractors, equipment, AND the travel to get there and back?  I’m not sure (yet). – But I will be looking at it shortly. Job costing is always related to debt. If you are in the medical field, it’s trickier, because a majority of money is coming from insurance companies with a set amount of what they pay for a particular procedure. The medical office has to make sure that they are making enough money with co-pay, self-pay, and incoming medical insurance checks to still make a profit. And insurance companies don’t pay quickly some of the time, so you might be waiting for money that’s owed to you for a few months. 

The other kind of payables are vendor bills that you enter into your accounting system. Even if you are on a cash-based tax method, accounting software lets you enter vendor bills on an accrual basis (credit card expenses are considered cash basis).  Each bill that you enter into the system has a bill date, and a due date.  If you enter both of them correctly, then you can run reports on what bil.ls are due to get paid before they are overdo. You can then prioritize those bills in order of importance to keep your company going. If need be, you can pay a vendor bill with a credit card, and although it’s still debt to you, at least the vendor is paid. Especially with a new business, cash flow is always an issue. You have a certain amount of cash come in every month, and bills that need to get paid. The restaurant business, for one example, has about a 4–5-year period until it’s expected that the company will start to make a profit, unless you are very lucky. So, be prepared to feed your own money into your new business or to take out loans or credit lines to help fund for a while, knowing that eventually, the company will start making a profit. Try and get terms on as many vendors as possible so that you don’t have to pay at the time of the purchase. If they don’t give you 30-day terms, then try again in a month or two after you have done more business with them. Eventually, they will give you some credit terms which makes things a bit easier in terms of cash flow. 

With a new business, there is always debt.   The trick is how to pay it back in an organized manner.  It’s obviously difficult to impossible for me to diagnose how to fix and pay the debt back without actually looking at numbers and looking at the books, but this episode, I hope, I have given you some ideas of what you can look at.  I’m not a certified financial adviser as mentioned at the beginning of every episode --- I am a bookkeeper and knowing my clients’ books as well as I do because I’m in the weeds, I have helped many clients get through the enormous debt that accumulates as you open your own business.  

The A/P reports in most accounting software to run would include:

1. Unpaid Bills- This shows all unpaid bills.
2. Accounts Payable Aging- This report has columns that are customizable that default as 30, 60 and 90 days overdue, as well as what bills are current in a summary format.
3. Accounts Payable Detail – This shows each vendor bill with the 30-, 60- or 90-days column. 
4. Cash Flow Report (This report is accrual based, so if you are not entering customer invoices and vendor bills, the report won’t show you much) It’s designed to show you how much money is expected to come in and out with the dates that you enter for the report.

Please reach out if you would like a consultation about your debt, or if you are looking for a bookkeeper.  I will have some openings coming up for quality clients and I know since you’re listening to this podcast, that you would be a quality client! 

Until next time, (if I survived the September 15th extension deadline and the preparation for the October 15th extension deadline) I continue to be (I think) Paul Rosenblum.