Townsend Wentz is a chef and the owner of five restaurants. He launched his business with $1.5 million which came from equity in his house, his daughter’s college fund, and virtually all of his retirement. The Wall Street Journal reported in April that he also has $715,000 in personal debt on one location. Wentz told the Journal that with his restaurants periodically closed in 2020, balancing his books is “like trying to stand in quicksand.”
The restaurant industry was just one of many hard-hit parts of the American economy in 2020. But like almost three-quarters of other small business owners, Wentz wasn’t just hurt by consumer fears and government lockdowns. He entered the unexpected pandemic downturn with a self-imposed anchor on success: unnecessary debt.
As we wrote last year, debt “decreases your company’s flexibility during a downturn, increases the costs of your outlays, and reduces the company’s overall growth potential.” Wentz’s company grew quickly, but now his company’s future – as well as his personal financial scenario – are on the edge of disaster because of his risky financial strategy.
We don’t want you to ever be in Wentz’s shoes, so our founder published a three-step plan with Forbes.com to eliminate debt and turn the savings into long-term company growth.
Cut where you can to invest where you should
First, eliminate unnecessary spending and put it towards faster debt repayment. This can be as simple as reducing the number of company-paid meals or buying in bulk, and as complicated as changing executive compensation or moving the company to a cheaper office location.
Second, streamline operations to reduce costs, improve productivity, and increase profitability. Southwest has famously done this by flying only Boeing 737 planes – reducing training and purchasing costs and improving pilot training – and making its planes’ flight patterns more efficient to decrease passenger transit time and to put more passengers on each plane.
One logistics expert told our founder that his former employer saved thousands of dollars per year just by changing their record storage procedures.
“Our vendor charged by both the number of trips made to our office site and by the number of boxes transported per trip. We streamlined the process by having four departments coordinate same-day pickups instead of each department ordering pickups at separate times,” said [Dan] Hoare.
One pandemic-induced example of operational streamlining is making sure that salespeople can effectively have prospect and client meetings remotely. This saves massive dollars and time costs, and may increase salespeople’s productivity.
Third, once spending is cut and operations are streamlined, pay down debt as fast as possible and increase cash on hand so you can focus on growth. With the debt anchor removed, mountains of possibilities suddenly exist to invest in matters such as:
- Infrastructure which has short-term costs and long-term gain, such as better vehicles for home service and taxi companies and charting technologies for hospitals which reduce error rates and save staff time.
- More-skilled staff who will further improve operational efficiency, stay longer, and develop profitable customer relationships.
- Market research to fine-tune and/or expand your marketing and branding.
Debt-free is the way to be
No set of guidelines can cover all scenarios; cutting spending or streamlining operations will always have a point of diminishing marginal return – you don’t want to cut pennies when you could be earning dollars. And in rare cases, debt is a valuable tool to create durable, profitable scalability.
But most small business owners aren’t using debt to scale – they’re using it to get their company off the ground or to keep it afloat. This isn’t just a pandemic issue; more than 40% of companies surveyed by the Federal Reserve increased their debt load from 2017 to 2018, when the economy was strong.
What is popular is not always right. Being debt-free is the path less traveled to greater business success.