EntreLeadership - How to Tackle Debt on My Businesses

Episode Date: May 13, 2020

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It's an entree leadership theme hour. We're talking with and four and two small business owners. 54% of the U.S. economy is based on the GDP, the gross domestic product, is based on small business production. And they've been particularly hard hit during the coronavirus crisis, the coronavirus shutdown, the coronavirus suppression. The good news is they will be some of the easiest and first to come back. Small business people float like a butterfly sting like a bee. They get her done. and so we're big fans always have been. We are one of you. We are entrepreneurs.

Daniel Tarty joins me this hour, Entree leadership executive vice president and operating board member here at Ramsey as we take your questions about small business. The phone number, AAA-825-2-2-25. Santana is with us in Tennessee. Hi, Santana. Hi, thank you for taking my call. Sure.

I have, okay, we have three days. businesses, three small businesses, and they kind of go hand in hand with each other. We have a diesel repair shop. We have a trucking company that does over the road trucking, and then we have several rental properties. So we have three different businesses. Each one of those businesses has debt. So there's loans that go along with each one of them, and then my husband and I have personal debt as well. I just started listening to you in February. and then I just finished the financial piece just here recently with the Hope offer that you all are offering. My question is, I don't know whether to do a budget for each business because those loans are tied to those businesses.

And then also, we don't have a steady amount that we pay. ourselves. I don't even know if we're supposed to be paying ourselves, but for those personal debts as well, I want very badly to make a budget and stick to the budget so that we can get out of debt. I just don't know how. Okay. That's cool. This is great. Well, the thing is, it's a mess. Yeah, yeah. The thing is, you don't have any business debt. A hundred percent of your debt is signed for personally. So as far as the law is concerned, it's all personal debt. You've got it categorized as business debt in the way you're treating it, and that's fine. But there's no rule that says that the trucking couldn't pay off the repair place or vice versa.

Okay. Now, what I would do is I take your rental properties and I would make them a baby step six if you've been studying our stuff. Those are just personal rental properties. You have debt on those. I would treat those in baby step six. The other debts, how much debt on the repair shop? A lot. How much?

I don't know. I just started listening in February, and I've been trying to write down everything. I don't have all the numbers together. Okay. Who runs the shop? I do the bookkeeping, but I don't have a degree or anything like that. My husband wanted to start the shop. He worked on the road for 13 years.

Yeah. So if you were going to guess, how much would you guess on the shop? Probably property in all, $400,000. How much of that is going to? property? About $250. Okay, I'd put that $250 with your rental properties. That's real estate debt over in Baby Step 6.

And so you've got $150,000 in miscellaneous debt on the shop, roughly, roughly. Okay, how much on the, I guess you've got a truck debt on the over-the-road trucking, right? Yes. How much debt is that? It is $67,000. Okay. So you got $200-something,000 roughly in debt. not counting your real estate and not counting the what you've got at home.

Is that sound right? Yeah. Okay. And how much debt have you got at home not counting your home? Probably about $25,000. Mm-hmm. Okay. All right.

And what did you pay taxes on? What was your income on your tax return last year? The income was actually a loss. Okay. Then you, how did you guys pay bills at home? If your businesses were a loss and didn't make a loss, profit. I don't know. It came out to be like $4,000 of loss. What was your revenue on the businesses before you paid your expenses? How much income on the between all three businesses? On the shop,

it was it was about $600,000 gross. The trucking actually was just started here recently, So that was not on last year's tax return. Okay. All right. Here's what you need to do. You need to sit down with one of our endorsed local providers and get the books straight. Because if you're the bookkeeper and you don't know the numbers, that's a problem. Yes.

Okay. So we need to be able to take each of these situations and say, okay, the business, even if you combine them all, you look at them as separate departments. We've got the trucking department. We've got the repair shop department. we've got the real estate department. And out of each of those departments, the reason you were showing a loss on your tax returns, the depreciation on the trucks,

on the equipment, and on all the real estate, plus some of your expenses. So you really did take some cash home. And I'm going to guess and say it's under 100 grand, though, that you actually had available to take home. But you really need to get straight on what cash these businesses are producing, real cash profit, not counting depreciation, in other words. In other words, the repairs.

shop runs and it pays its bills what's left. Okay. And then the trucking business runs and pays its bills what's left. You may find that you want to close the trucking business and run the repair shop. You may find that if it's not profitable, you need to do that because you need to concentrate on where the money is coming from and then make that money. Then you can start to run, once you've got a good set of books, then you can start to determine what is reasonable to try to take home to pay my bills at home and to begin to pay off that $25,000. But you've got $200-something,000 to pay on these other two things. There's plenty of money to throw that direction at the business.

Well, and there's a lot of money coming in. One of the nuances in business is you don't want to sell everything just to get out of debt if selling the thing causes your business to shut down because that's your source of revenue. So Dave's exactly right. You want to get real numbers so that you know what you're working with. Then you want to work on getting your profit margins up. Okay. So if you operate it at a loss, we don't want to stay there. We want to get your margins up.

And you guys are going to pay yourself a modest salary for a while until your profit margins are really rocking. And you can pay yourself $80,000 a year and apply everything we teach in personal finance to start paying off the personal debt through that $80,000. And then over here in the business, while you're getting your profit to increase, you're not paying yourself a bonus. You start paying off the debt, you get the healthy margins, and then you can pay yourself the 80,000 plus a bonus based on the profit. And that's where your gravy can come from as a business owner laid it down the road. Here's what I want you to be looking for.

I want you to be looking for what in the shop is most profitable and try to grow that area of business. What has the best margins? And because over the years of coaching, Santana, I don't think this is the case with the numbers you're giving me. They don't, I don't believe so. But I have run into people who, if they paid themselves rent on the, on the shop, because you own the building, enough to cover the mortgage, or what market rent was, if you were just to be a renter, that the shop actually ends up not being profitable, meaning the only thing that's profitable is a piece of real estate.

I've run into that situation. I don't think that's the numbers in your case, though. I think you're running too much top line unless you're just mismanaging your expenses to no end to not have good profit coming to the bottom. On 600K, I'm going to guess and say you're probably making $100, but minus depreciation. get you down to a $4,000 loss because you've got a truck that depreciate that you bought, well, you bought that this year, so that wasn't in there. Yeah, but your point is revenue is coming in, so something's working in there.

Yeah. And you need to maximize that thing that's working. Well, as long as you're not, you know, bringing in $600 and spend a 700 to do it. So you need your cut expenses or maybe raise your prices a little bit and get that margin up. That's the thing. Find the sweet spots in the business, and then let's work on growing that area of the business. Or every time that type of business rolls in the front door, then you're smiling because you know it's got good margin. and it's a way you can serve your customers well, obviously.

So that's what I'd check on. That's what I would do. You're really going to have to get on top of your numbers, and that's going to help you solve a whole bunch of these issues. You need to know what your debts are, what your assets are worth, what the income is, what the expenses are, what the net cash flow is, and then what the net profit is. This is the Dave Ramsey Show.