Death to Debt: Trim the Fat

If your business — and by extension, you — are in debt, it can be hard to know the right moves to reclaim your financial health. You’ve already changed the way you think about saving, re-aligned your budget to reality, and started taking action. Now you’re ready to target your debts with laser-focus and precision… but how? Where do you start?

Using the Profit First method for tackling debt, we’ll immediately put a freeze on accumulating more debt, apply the profit you are guaranteed to have to existing debt, and create winning habits that you can immediately celebrate.

P-R-U… Prudent spending

The knee-jerk reaction for debt-weary business owners is to panic and shut all spending down entirely. “Not a single dime shall leave this company!”

That’s not the way. Take a deep breath; we’re going to cut costs, but not jeopardize your entire business. Some costs are essential and actively generate or support income for your company — those will stay. You want to trim the fat and leave the muscle. To achieve that, grab a pen and some financial reports: your income statement for the last twelve months, credit card statements, accounts payable report, and anything else related to debt.

Line by line, go through spending reports and mark each expense with one of the following letters:

P — P is for any expense that actively generates Profit.
R — Replace… necessary expenses that can be replaced with a cheaper alternative.
U — Unnecessary to delivering your product/service. Byyyyye.

Do this for every single expense. Don’t cheat. I see you. Do this for salaries, bonuses, office rent, coffee, health care. Everything gets a P, R, or U.

You might find yourself biased on categorizing. No one wants to hear their choices were unnecessary. Lean towards harsh, but if you need an extra push, ask someone outside your business to do this with you. They will not be as attached to the expenses as you might be, and can help you see through the “but I do need that!” haze.

Once that’s done, circle the expenses that recur annually or more frequently than that — monthly, weekly — even if the amounts aren’t exactly the same each recurrence.

Total up everything you labeled or circled, excluding taxes and any form of owner’s pay. Now you know your monthly must-pay number. But… this is the former must-pay number. Remember, you’re in debt and need to trim the fat. Find the difference between your monthly must-pay amount and the amount it should be. Immediately cut the U’s on your list- no internal debates allowed. You don’t need it.

Put a freeze on accumulating more debt, apply the profit you are guaranteed to have to existing debt, and create winning habits that you can immediately celebrate.

A snowball attack

Now that you’ve stopped the bleeding, you’re going to be throwing money at your debt. The best way to feel productive on this is by ordering your debts smallest to largest, and tackling the smallest one first. You’ll experience a “that is fully paid off!” win sooner, and that emotional momentum will keep you focused.

Make sure you’re not adding to your debt in a different place as you pay off others. This game of “shuffle the cups” is not progress! Check in with yourself and your finances often to ensure your new habits are sticking.

Don’t self-flagellate

Assuming you’re using Profit First, you’re using 99% of your profit to reduce debt. That remaining one percent… that is yours. Celebrate the huge, life-changing shifts you’ve made. Celebrate the improvements and your dedication to getting yourself out of the muck.

Originally published at https://tryledger.com on March 6, 2020.