As a massage therapy business owner, daily financial decisions are a constant. These choices become particularly difficult when cash flow is low, often leading to reliance on credit cards, lines of credit, or business loans. If you find yourself struggling with debt, there are effective debt management strategies to regain control. This article explores the basics of debt, distinguishes between good and bad debt, reviews common debt repayment methods, and offers advice on avoiding excessive debt in the future.
Key Takeaways
- Differentiate between personal and business debt by examining your balance sheet.
- Not all debt is detrimental. Good debt supports business growth, such as financing a new massage table that boosts revenue. Bad debt, however, offers no substantial return and can burden your finances.
- Maintaining manageable debt levels is crucial for securing investments and loans, as well as protecting personal financial health. Excessive debt can jeopardize cash flow and operational stability.
- Strategies to prevent excessive debt include increasing revenue, reducing costs, negotiating loan terms, building an emergency fund, and planning for expenses.
What is Debt?
Although this might seem self-explanatory, it’s still essential to cover the basics of what debt truly is. The dictionary definition of debt is “something, typically money, that is owed or due.” Too often, massage therapists have too narrow of a view of debt. Debt doesn’t just include installment loans or a line of credit; in fact, debt could be credit cards, a vehicle loan in the company’s name, or a note payable to owners of the company.
Anything that you owe, regardless of whether it’s with a related party, is included in debt. The easiest way to determine the debt in your massage therapy business is to look at your balance sheet under the liabilities section. What types of notes payable do you see? Are there accrued liabilities that still need to be paid out? You need to make a clear distinction between personal debt and business debt.
What is the Difference Between Good and Bad Debt?
Contrary to what you might believe, not all debt is bad. In fact, debt can be a great tool if adequately leveraged. For example, you need a new massage table that costs $3,000. You don’t have the cash on hand to outright buy the table. The only way you would be able to afford it is to finance it through a credit card or draw on your line of credit. You’ve heard that debt is bad, so you refrain from purchasing the table.
What’s the trade-off? Maybe purchasing that table improves your capacity by 25%, allowing you to realize a 25% increase in sales. Paying a small amount in interest doesn’t seem like a bad idea if you are sacrificing business growth. If done correctly, debt can be beneficial to your organization, allowing you to reach your growth goals, improve productivity, and prioritize customer demands.
There are a few ways you can differentiate between good debt and bad debt. If the debt provides no real value in return and is just a “want,” it’s probably not good debt. This could be purchasing a new personal vehicle under your company or anything that doesn’t increase your business’s financial situation and costs you significant amounts of interest.
On the contrary, good debt helps your business grow and is done through strategic purchases, like more efficient equipment.
Why are Healthy Debt Balances Important?
Maintaining good debt is important, regardless of which stage your massage therapy business is at. For one, lenders and investors will analyze your current debt before making their decision to infuse capital into your business.
If you already have a high debt-to-income ratio, you might not be able to secure a much needed investor or an equipment loan to grow your business.
In addition, many massage therapists have their personal finances tied to their business. If your business is showing too much debt, you might have a difficult time purchasing a home or a new personal vehicle. Maintaining good business debt flows through to your individual financial health.
Too much debt can also impact the risks in your business. Interest on debts must be repaid even if your business is not showing profit. Too much debt can eat into your free cash flow and cause you to default on other payments, like employee payroll or vendor invoices.
Especially in times of rising interest rates, you want to be careful of the debt you are taking on. Do you really need that new vehicle at a 9.0% interest rate?
What Methods Can I Utilize to Get Out of Debt?
If you find yourself in a financial situation that is less than ideal, one of your business priorities will be to pay off the debt as quickly as possible. There are a few different ways you can go about repaying your debt, including:
• Snowball Method – The snowball method involves paying the smallest debt off first and working your way up. However, you still need to be making the minimum payment on all of your debt.
• Debt Avalanche – The debt avalanche method is the opposite of the snowball method, tackling the largest balance first. If you are someone who likes small wins, start with the snowball method first.
• Debt Consolidation – Debt consolidation combines all of your debt obligations into one primary loan. This can be more difficult if you hold lines of credit or installment loans through financial institutions. Debt consolidation is more common when it comes to credit card debt.
• Highest Interest Rate – This method involves paying down the debt with the highest interest rate first. Generally, this will be your credit cards, as lines of credit and installment loans have lower fixed rates.
Which of these four methods fits your style the best? Keep in mind that you have other options outside of this list to help you pay down debt. Can you reach out to your credit card providers or lenders and renegotiate the terms of your debt? Maybe you are able to lower your interest rate and put more money towards your principal balance or decrease your payments while you pay down other options.
Lenders try to avoid having to go to bankruptcy court or having their customers default on loans, meaning they are generally willing to work with you to find a happy medium. Be sure you reach out to your lenders before you are at risk of defaulting on payments.
How to Avoid Taking on Too Much Debt in the Future
Repaying debt takes time. If you are finally seeing the light at the end of the tunnel, it’s crucial that you set yourself up for success and avoid taking on too much debt again in the future. Let’s look at some strategies to avoid falling into debt again.
• Increase Your Revenue – By increasing your revenue, you are generating more free cash flow, which can be used to support your operations and maintain healthy debt levels. Growth and upticks in revenue take a conscious effort. This could entail running a new advertising campaign or hiring a social media manager. Be sure that costs associated with increasing your revenue don’t exceed your extra revenue.
• Reduce Costs – If your revenue is stagnant, consider reducing your costs to increase your cash flow. A budget can help you properly reduce costs. Go through the last months’ worth of expenses and pick a few categories that you can reasonably reduce. Then, make it a priority to work towards cutting costs.
• Negotiate Terms – If taking on new debt is inevitable, such as for a large equipment purchase or office remodel, be sure that you are negotiating your terms. Before you sign on the dotted line, confirm that you can meet the monthly payment without sacrificing other areas of your business.
• Build an Emergency Fund – One of the primary reasons that businesses go into debt is because of a lack of savings or an emergency fund. You should have around six months of operating expenses in an emergency fund. This ensures you can foot an unexpected bill without having to take on more debt.
• Plan for Expenses – Planning goes a long way when it comes to avoiding too much debt. If you know you will need a certain amount of money, start saving a little each week or month. Plan ahead to avoid panicking and taking out a new loan or charging the item to a credit card.
These are a few ways that you can set yourself on the path to successful debt management. If you don’t already have a healthy savings account or emergency fund, make that one of your priorities. Each month, when you have extra cash flow, throw a few hundred dollars into the account. It’s always nice to have a little cash cushion.
Take Action to Get out of Debt
What does your debt situation look like? Just because nearly 3 out of 4 businesses carry debt doesn’t mean you have to. Take a look at your current debt and determine if you have good debt or bad debt. Then, make an action plan using one of the above methods and start working toward healthy levels.
Understanding debt on your own can be tricky, which is why it can be beneficial to partner with an expert who can create a customized debt repayment plan that is in line with your business goals.
About the Author
Lozelle Mathai, MBA, CFEI, is a financial accountant with over 18 years of experience in the field of financial management and accounting. She is the owner of The Body of Accounting, a division of Closing Your Books LLC. The Body of Accounting is an accounting consultancy firm that educates massage and bodywork business owners on how to manage, maintain and understand their business finances, including how to determine the best structure for their business.
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