It’s not a surprise in the U.S. to hear that consumer debt is rising. Credit card debt is increasing at a higher rate than any other consumer debt (like mortgage, auto, or home equity loans). You know what else is increasing? The interest rate on that debt.
Credit card debt is the easiest thing to fall into. You buy a few things and start a small debt load. Along with credit card debt, sometimes contractors are also making less than full payments to suppliers. In a few months, the $2,500 to $3,000 you owe at the end of the month is $6,500 to $7,000. And so it grows, month by month.
Almost always when we hear from a contractor who is deep in debt, they aren’t charging enough for their work. There isn’t enough money in their jobs to pay all the suppliers, subcontractors and labor, as well as cover the business overhead expenses. Sometimes it isn’t business debt that’s dogging them, it’s household debt because they didn’t charge enough to pay themselves a salary.
Other times, “I want, I want” gets in the way of paying the bills. Whatever the cause, before you know it you’re in over your head. Your personal debt ceiling is a moving target; it’s what you get comfortable with. Each month as the debt grows a little more, you find a way to rationalize it. I’ve had business owners tell me, “No big deal, I can pay it off in a month.” To problem with that is, they never do.
The only one who wins when you’re in debt is the credit card company. The interest payments mean less cash is available for your business. Sales might slow down, but interest expenses don’t, they keep marching on. It’s an overhead expense you can’t reduce and you can’t control. The nickels and dimes add up and can wipe out your profit.
Credit cards aren’t bad if you handle them right. The cash back and airline companion fares you can earn are a plus if your debt is paid in full each month. Credit card companies can afford to provide those benefits because they know most card holders won’t pay in full and instead will pay far more in interest and fees than they will ever collect in benefits.
Credit card debt isn’t the only way to get into financial trouble. As a business owner, you’re likely collecting tax money from others, like employee payroll taxes and sales tax on jobs. It’s your responsibility to submit that money to the taxing authority.
It’s tempting when the money is there to borrow it for another bill or perhaps a new toy. Don’t even think about it. The government agency that you owe, whether it’s sales tax or payroll tax, is bigger than you are. There is no limit to how much time and money they can invest to recover the funds you owe.
Make sure funds for those taxes are safely set aside so they’re available to pay when needed. This takes discipline, but in the long run it is one of the best business habits you can develop. The money gets set aside and when the taxes are due, you have the money ready to pay.
The IRS also wants a share of your income. Look at last year’s tax return to see how much you paid, or ask your accountant, but make sure you’re both setting aside sufficient funds and making estimated tax payments as needed.
The worst part of being in debt is that it’s a distraction. Like a bad tooth it’s always there, nagging away. If you’re in debt, especially credit card debt, set the goal of becoming debt-free. Put a plan together to get it done. No toys, no nothing. Business is difficult enough without the albatross of debt hanging around your neck.
If you aren’t in debt, either business or personal, commit to stay that way. Sometimes a planned investment will put you in debt, and that may be okay if you have a realistic schedule to pay it off before the debt is taken on.
Make sure you’re charging the right price for your work. If you haven’t yet, read Markup & Profit and take one of our classes. If you need help or want to talk, I’m available here. It takes discipline to stay out of debt, but it sure beats lying awake at night wondering how you’ll pay your bills.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.
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