EntreLeadership - The Business Debt Trap That Destroys Companies

Starting point is 00:00:05 In my 20s, I built a real estate business on debt. It grew fast. It looked impressive. But then, the bank called our notes. I went bankrupt, and I got the opportunity to start over. So when I started this company, I swore no banker would ever tell me what to do again. I'm not going into debt. No borrowed money.

Starting point is 00:00:26 No borrowed opinions from investors or bankers. No building a house of cards that could collapse the minute someone else got nervous. We were going to build it slow. We're going to build it solid because we're going to pay cash as we go. When you owe money, you don't fully own your decisions anymore. You start making calls based on what the bank needs, what the investors want, instead of what's best for your team, your customers, and your long-term goals. So on today's episode, Entree Leadership's head coach, John Falcons,

Starting point is 00:01:01 is sitting down with Ramsey Solutions CFO, Jeff Williams to talk about what it really looks like to scale a business without debt. So you can stay in control and protect your business from bankruptcy. Let's get to it. Jeff, thanks for joining us today. Glad to be here. Thanks for the invite. So CFO of the company, I'm wondering what you think when you see all these companies in the news going bankrupt. Might be Radio Shack or Toys R Us or whoever it is.

Starting point is 00:01:32 And all of them are really. way into debt. They're, you know, they're working off of other people's money. They're leveraging. There's all these strategies. But then we've got companies like our company, Ramsey's Solutions, and zero debt. And then when the storms come, whether it be the, you know, the economic crisis or COVID or whatever it is, they don't go out of business. And they're not leveraging debt. What do you, from your perspective, take away from that? And when you sit with some of our clients in our coaching program, what's your advice to them about using debt? Yeah, a lot of companies that you see, especially small companies, that try to use debt,

Starting point is 00:02:15 what they're saying is that they want to grow faster than maybe their cash flow will allow them to. And so to bridge what they are having cash to what they need to grow faster, whether it's another piece of equipment or buying another company or whatever it may be, they seek to bridge that gap with debt instead of just paying cash with it. Dave went through bankruptcy in the late 80s. That's what started us on this journey that brings you and I here today. And so Dave's approach to business has been impacted by bankruptcy risk. He is intolerant of that. And lots of companies out there like us do that. And that's a choice that's made. It doesn't mean you can do every single thing that's possible. But it does mean that you're not going to ever be in a place to where

Starting point is 00:03:00 you have to worry of whether or not you're going to make payroll this week or whether or not you're going to be able to pay your bills, whether it's payroll or other bills. It's growing at the speed of cash is not for everybody, but it is for us. And whenever those downturns happen, we're probably still sitting flush with cash and we're not as worried about it. Whenever I first became CFO, I asked the gentleman that I was replacing, I'm like, what is the most important role of the CFO? And he looked at me and he said, don't ever run out of cash.

Starting point is 00:03:31 And that was a company that was laden with debt. And he had the same message that Dave has here and that we would encourage all of our entree leadership clients to do. You don't have to grow as fast as the one down the road. But you can be smart whenever you're making those decisions because once you go down the path of taking on debt, you're giving up some of the control in the decision-making that you wouldn't give up otherwise.

Starting point is 00:03:53 Yeah, you and the bank start to get to be partners. They have, yeah, they, they, they, they, impact the decision making that you'll make until the loan's paid back. Because they're going to put covenants on you or they're going to put handcuffs on you to where you can't do certain things because they don't want you to file bankruptcy. They want to get their money. Yeah, that's not good for them. And that's why their buildings are a whole lot nicer than yours. So you just mentioned decision making. It affects your decision making when you're in partnership with the bank essentially. We're not. Talk a little bit about how that impacts your

Starting point is 00:04:26 decision making, our decision making, when we're looking at growing the business or different things, talk about that a little bit and how that affects what you do and how our whole leadership team looks at the finances of the business. Yeah, it was something that was very eye-opening to me when I started here because all of the companies I'd worked for up to this point were companies that used debt to fund their operations. They had equity and they had bank debt as well. And so coming in here and not needing any of that skill was interesting to me. I was like, I don't even know what this is supposed to look like initially.

Starting point is 00:04:59 But then I got to realize, wait, if you don't have to have money that the bank gives you and you just have your own money sitting in those banks, you have all the flexibility in the world about decision-making. You can do whatever you need to do. I don't have to have an audit of my financials every year. Whenever I was a company that had bank debt, I was required to pay $50,000 to $60,000 a year to a third party to come audit my books so that the bank could have a bank. confirmation that we're doing things the right way. I don't have to have any of that

Starting point is 00:05:29 stuff here. Whenever people ask me for our financial statements, our audited financial statements, I'm like, all I've got is a bank statement. I don't have a set of financial statements because I don't have them, none of them are audited because they don't have to be. We do take great care to put controls in place to help manage those things, but it affects, for us it gives us great freedom where we don't have to answer to anybody. The only thing we have to answer to is, is to the strategic decisions that we want to make, how fast we want to grow and we are only going to we're not going to grow any faster than the speed

Starting point is 00:05:59 of cash and as the CFO I put floors on that in terms of what I'm willing to let us go down below or down to as far as our cash balances. We have emergency fund money sitting out there that we won't go below and so it makes the decision making it a lot easier because you don't have to think, hey I wonder what this bank is going to think or I wonder what this bank is going to think about this. Oh I got to call them and tell them, hey we didn't do what we thought we were going to do or it didn't work out as well as I thought was going to work out. cash as I thought we were going to create, it makes everything more complex whenever you have

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Starting point is 00:07:30 Go to CH ministries.org slash entree and use promo code entree. That's CHministries.org slash entree and use the promo code entree. Now let's get back to our episode. That sounds fantastic. I hear all this freedom, right, that we have. I hear you're using a phrase a couple of times, you know, grow at the speed of cash. Is there a trade off though?

Starting point is 00:07:55 You know, is there a downside to only operating off of cash? Or even if we don't think there is, do you think people perceive there to be a downside from not using debt to grow their business? I could simply say, well, that just simply means that there are opportunities that you're going to see out there that you won't be able to do. And you've got to be okay not doing those things for a season. It doesn't mean you'll never get to do them. It just means you're not right now. I mean, you could go and do the debt aspect of it and get yourself handcuffed and not know how things you're going to go because now you have to listen to what the banks have to say. But doing that as soon as you do that, you give up a portion of the decision rights that you have around running your business and you're no longer in business by yourself.

Starting point is 00:08:41 It seems like, though, some of the industries, some of the businesses that we've talked to, they've got a lot of capital requirement. They got heavy equipment, expensive stuff to get going. What do you say to them when you sit with them when they say, I can't even hardly get started without taking out alone to buy this piece of equipment to do this business? My answer is the same. If you want to take on that risk and you want to risk potentially losing everything that you've got in order to do it over a certain quick time frame or to compete with your body down the street, who's got the same business that's doing better than you, then you can do that.

Starting point is 00:09:18 That's just not what we've chosen to do and not what we recommend people doing because we've got a very, very, we put a very high price on bankruptcy risk and we're not willing to do that. I feel like no matter which way I ask you this question, you're gonna give me a similar answer. That's right, John.

Starting point is 00:09:33 The answer is the same because it's a zero-some thing. I consider in all day long theoretically talk you through all the stuff around debt, but I'm not gonna do that because it doesn't matter. Okay, all right, I'll quit. Yeah, I'm done with that for right now. I'm done with that for right now. Let's switch gears.

Starting point is 00:09:47 Okay. Let's say we're sitting with a business owner who already is in debt. They've already done this. They started their business. How do you coach them? How do you advise them to go from where they are to get, after listening to you, they're like, okay, I want to be debt free. I want to do what Jeff's talking about.

Starting point is 00:10:04 How do they make that move? It's similar to what we teach in the baby steps. It's get your debts paid off as fast as you can. Don't run ahead of it so far as to put yourself in harm's way. the economy were to take a downturn or you were to lose a big account. Be smart about it. But go about it, run at it with Gazelle intentionally and run out it as fast as you can because the quicker you do that, the quicker you get to take those handcuffs off

Starting point is 00:10:29 and get all that breathing room back that you didn't have. All the times that you'd spend late nights and weekends thinking about, I've got to talk to my banker on Monday. I don't know what they're going to think about this because we can't make our loan payment again this month. All that stuff's gone. You don't answer to anybody other than yourself. You said something I want to unpack a little bit. go after it as fast as you can without putting yourself in harm's way.

Starting point is 00:10:52 What's that mean? How could you put yourself in harm's way? What should they look out for? What I mean by that is if you empty your bank account every month for the purpose of paying off your debt, that's too far. You've got to leave yourself some room, leave yourself some kind of wiggle room there of cash in case something goes wrong, in case that piece of equipment blows up, in case you lose a big account. You want to go at it in a measured way as fast as you can and not just abandon all the normal responses to keeping good reserves for your business. And a lot of that is like rainy day funds and those kinds of things, but do it in a measured way and pay as much as you can as fast as you can.

Starting point is 00:11:32 And don't go too far, though, because you don't want to put yourself in harm's way. How do you balance? Okay, let's say we're doing that, okay? We're being logical about how fast we're paying off the debt or at least not putting our operations in jeopardy by cash starvedoms because we get all fired up because we listen to Jeff Williams on some show, right? Yeah, exactly. How do you balance, because we get this question in coaching frequently. Yeah. Increasing retained earnings and paying off the debt.

Starting point is 00:12:00 Do you do all one or the other or do you recommend some of both? I would not put a bunch of money into retained earnings if I have debt. I would put as much of that toward the debt as I can, because I'm gonna make it back much faster once that debt's all gone. Today, a portion of every dollar that comes in, part of it has to go to pay the debt, part of it gets to be retained.

Starting point is 00:12:20 If you can make it, if you can, again, do it in a methodical way that keeps you with enough cushion to where if something blows up, as I said earlier, I would throw every single thing that I can at that debt and minimize what I'm putting into retained earnings because retained earnings is sitting there. It's not doing anything for you. And your interest that you're paying on your debt

Starting point is 00:12:37 is way more than the interest you're gaining that money sitting in retained earn. Right. That's right, but the interest you're earning on retained earnings isn't as much of an investment strategy, particularly when you have a small business is just insurance in case something bad happens, right? Yep, exactly. And I don't want you to take it to zero.

Starting point is 00:12:54 Okay. I don't want you to plead all of your retained earnings. I'm just saying just slow down how much you're putting into retained earnings and pay as much you can toward the debt. Okay. What about another question that we get is profit sharing? If your business is in debt, you're getting aggressive on paying. that off. Should you be doing profit sharing while you're trying to pay down your debt?

Starting point is 00:13:13 I would say no. I would pay off the debt first and then do a nice profit sharing plan after that. Because right now, paying out that profit sharing to your team is slowing down what you can pay to get out of debt. And I don't think your business is healthy enough to have a profit your plan if you got a bunch of debt. Let's just put a bow on it. You're sitting with business owners all the time. What's the one thing that you would say to them about their decision to either, you know, take on some debt to grow their business, speed up the growth of their business versus growing up to speed of cash.

Starting point is 00:13:44 What would you tell them? I think that they need to really count the cost of what giving up the control of the decision making around their business really costs them. Because it affects behavior, and that's why they do what they do in putting covenants and other restrictions on you

Starting point is 00:14:00 on how much you can go spend on new trucks or how much you can pay to yourself whenever you're in those situations, banks. Put all those limitations on you, and that affects your decision-making. It can cause you to get to where you're no longer looking long term. It's always a short-term kind of mindset. And that's an outcome of this kind of a decision of taking on debt.

Starting point is 00:14:18 And I believe it's true, whether it's bank debt, whether it's family debt or any those other things, which I would highly just recommend you not do that. We could do a whole talk on family. We could do that a whole bunch, and it can get really messy. But that would be my count the cost of giving up. You went into business on your own so that you can make the decisions on your own. When you go into debt, you cease making the decisions on your own. That's good stuff.

Starting point is 00:14:42 Thank you, Jeff. I'm welcome. Thank you. I thought you're going to shake my hand. I can if you want to. Do you want to hug? Nope, I'm good. Okay.

Starting point is 00:14:50 So if you want to truly own your business, don't owe it to someone else. And if you're sitting there thinking, okay, I want all that, but I don't know how to get there. Well, that's something we can help with. Our team at Ontario Leadership works with business owners every single day who are trying to build strong. profitable, debt-free companies. If you'd like to talk through where you are and what your next step is, go ahead and schedule a free 30-minute business consultation with one of our Entree Leadership coaches. We'll link it in the description. And if today's episode is encouraged you, be sure to like, share, and subscribe for more great leadership content.

Starting point is 00:15:29 I'm your host Dave Ramsey, and this is Entree Leadership.

EntreLeadership - The Business Debt Trap That Destroys Companies

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