4 Toxic Habits That Will Sink Small Business In Colossal Debt: Every Dollar Goes to Repayment

Many small businesses struggle with debt, and if they’re not careful, it can easily pile up into huge amounts. Today, I’ll explain four typical toxic habits that small business owners develop that can lead to massive debt accumulation without them even realizing it.

1. Can’t See How Much You Are Using

When you don’t keep books yourself, or you don’t read them at all, or in the worst case, there’s no bookkeeping whatsoever, you simply can’t realize how much money you’re using. This becomes especially dangerous when you use credit cards without actually paying cash and ignore the statements from the credit card company. In these situations, you can end up spending huge amounts of your money without even realizing it.

If you don’t know how much you’re spending, it becomes all too easy to use more than you have, which directly leads to debt. To change this situation, you can start doing the bookkeeping yourself. By doing this, you can clearly see how much you’re using. When you see the actual numbers, you’ll naturally start to reduce spending.

This process is similar to trying to lose weight. If you weigh yourself every day, you don’t necessarily have to force yourself to go jogging or follow a strict diet – you naturally become more mindful of what you eat, and you might even choose to go jogging voluntarily. The first crucial step is simply realizing how much you’re using.

2. No Cash Flow Planning

Many business owners don’t plan their cash flow – some don’t even know what it is. Cash flow timing is critical. For example, if you need to pay your debts now but won’t get paid by customers until next week, your business could fail. Without a plan, you won’t know how much is safe to spend. Looking at individual transactions alone, it’s impossible to see if your spending is sustainable. But when you map out multiple years in your cash flow plan, you can clearly see if current spending patterns will eventually sink your business.

The solution? Start with a 12-month cash flow plan in Excel, then create longer-term plans spanning several years. It doesn’t need to be perfect. Just map out your expected money coming in and going out each month.

Here‘s how to make a simple cash flow statement.

3. Buy Things You Don’t Know If It Makes Cash Flow with Debt

Companies often buy things when it’s doubtful whether they’ll lead to future cash flow. Common examples include buying nice company cars (which surely won’t generate extra cash flow), sometimes purchasing loss-making businesses that you hope to turn around and make profitable, or launching new businesses by investing a lot of money from the beginning before being sure about their profitability. The problem becomes even worse when all this spending is done with debt.

If the new business or purchase only generates losses, that’s the worst possible outcome. You won’t be able to pay the debt from the cash flow of what you bought, and the debt only increases over time.

To avoid this trap, make sure anything you buy will definitely generate cash flow in the future. If you’re not completely sure, use cash you’ve accumulated from your business operations (operational cash flow) instead of debt. Betting on unproven ventures with borrowed money creates a high risk of getting stuck in debt.

4. Expansion = Debt Borrowing Head

When you expand your business, you usually need a lot of cash. However, borrowing isn’t the only way to fund expansion. There are many clever strategies that enable your business to grow without requiring large amounts of cash. I explain these strategies in detail in my blog articles.

These strategies include techniques like:

Before simply borrowing money, take time to consider these alternatives. With careful planning, you can often find ways to expand without taking on debt.