Updated: Dec 22, 2022
You have a business, but you may also have debt.
Debt is widespread for small business owners. But to pay off debt, you have to be profitable.
But how exactly do you become profitable when there are so many bills to pay?
Profit = making more money than you spend
It’s hard to think about being profitable or having cash in the bank until you pay off all your debt. Most people think that’s how it has to be.
But that’s a little bit of a myth.
But the only way to pay off debt is to be profitable. When you are profitable, you have excess money in your business. Then you use that excess money to pay off debt and past expenses.
You must make more money than you are currently spending to have profit.
Paying debt when you don’t have a profit
In this day and age, credit cards and loans are part of our everyday life. But when you have outrageous outstanding balances, and you aren’t making enough money to cover the payments, that’s when there's trouble.
But how do you pay the loans when you don't have a profit?
I encourage my clients to pay the minimum balances due out of the operating accounts. When the bills come, pay them. And pay on time, so you don’t have late fees. The money you have left in your operating expenses after paying your regular bills should go towards making additional payments to your small debt.
Small debt is the debt with the smallest balance, not the lowest interest rate, as you might assume. I advise my clients to pay off the small balances first because that will give them a quick win and motivate them to keep going.
Debt is a behavior problem.
Money habits are mathematical. You wouldn’t have borrowed the money if you hadn’t done the math right. Mathematically speaking, debt can be harmful to a business. And really, financial matters and debt are actually behavior problems.
When you pay off that small debt, you can roll that payment into the next smallest one. And that is a small win, right?? It’s motivation to keep going. When you get rid of a loan or credit card that you have been working hard to pay off, that is huge!! So no matter what, keep allocating your money to your profit account.
Taking Profit First
When you are doing your allocations, no matter what debt you have to pay, take your profit first. This is critical, even if it does sound a little bit crazy. You’ve got to take your profit first because you want to continue to take your profit first when you are debt-free. The goal is to have your quarterly profit distribution be 50% of the balance of your profit account.
The goal is to pay off your small debt as quickly as possible. So when you use part of your quarterly profit distribution towards the debt, you’ll pay off a big chunk every quarter. Then your debt will cut down drastically each quarter! Then you’ll take part of that quarterly profit distribution and make an additional payment to your small debt.
The remainder of that distribution will be to pay yourself. And be sure to celebrate! A small business owner needs to celebrate the small wins for working so hard and taking the risk. It’s an essential part of the process.
This process has you consistently chipping away at your debt from your operating expenses and then hitting it hard with your quarterly distributions. It's kind of like boxing where you see them jab, jab, jab, and then they come in with a massive right hook. Every month you're pounding away at the debt and then come in with the big payments each quarter.