Where Is All The Money Going Series: Chapter 7 - Debt: Helping You Build or Holding You Back?

Future Accounting
9 hours ago
4 min read

When borrowing creates opportunity — and when it starts controlling the business

Debt is not automatically a problem. For many successful family businesses, debt has helped fund property, equipment, vehicles, acquisitions, stock, working capital and expansion. Used well, debt can accelerate progress.

But every loan takes a slice of future cash flow. Every repayment reduces flexibility. When several debts accumulate, the business can gradually move from using debt to being controlled by debt.

Is this debt helping us move towards our goals — or is it making those goals harder to achieve?

Not All Debt Is the Same

Borrowing $500,000 to purchase an income-producing asset may be very different from borrowing $500,000 simply to cover recurring cash-flow shortfalls. The dollar amount is the same; the strategic outcome is not.

Productive Debt Versus Pressure Debt

Productive debt supports an asset, opportunity or strategy expected to strengthen the business or family over time. Pressure debt arises because the business cannot currently fund its normal obligations from normal cash flow.

What job is this debt doing?

Every Loan Is a Claim on Future Cash Flow

Imagine annual operating cash flow of $500,000 and loan principal and interest repayments of $320,000. Only $180,000 remains before tax, owner drawings, equipment replacement, additional working capital, investment or future growth.

A Business Can Be Asset-Rich and Cash-Poor

A family may own substantial property, machinery, vehicles or goodwill but still experience cash pressure if those assets are heavily financed. Wealth, cash flow and debt need to be considered together.

The Repayment Test

Ask how easily the business can meet all debt repayments from normal cash flow — not in a record year, but under normal conditions. Then ask what happens if things are 15% worse.

Don't Ask Only Whether the Bank Will Lend It

The lender is asking whether it is comfortable lending under particular terms. Your question should be whether taking the debt makes sense for your business and family. Those are not the same question.

Debt Can Hide a Margin Problem

Sometimes borrowing becomes the solution to a problem that should have been solved elsewhere: slow customers, low margins, excessive stock, high drawings or underfunded growth. Finance can relieve immediate pressure while masking the underlying issue.

Tax Debt Deserves Particular Attention

Tax debt can become normalised. But economically it is still debt. It consumes future cash and may signal that tax is not being provided for, margins are weak, drawings are high, working capital is poor or debt servicing is too heavy.

Know What You Have Guaranteed

Over many years, owners may sign business finance guarantees, property guarantees, supplier guarantees, leases and equipment finance. A useful risk-management exercise is to understand what guarantees exist, who gave them, which entities are exposed and whether they are still required.

Debt and Retirement

If owners plan to retire in seven years, what debt do they expect to remain? If the business is sold, what proceeds remain after debt? If it is passed to children, who takes responsibility for the debt? If property is retained, can the debt be serviced without business income?

A Simple Debt Stress Test

What happens if revenue falls by 10%?
What happens if gross margin falls by 3%?
What happens if interest rates increase?
What happens if a major customer does not pay for 90 days?
What happens if one owner cannot work for six months?

The purpose is not to predict disaster. It is to understand resilience.

Ask Yourself

How much total debt does your family group currently carry?
What is the annual principal and interest commitment?
What assets secure each facility?
What personal guarantees have been given?
Does each loan still serve a clear purpose?
Are you carrying tax debt?
Is the overdraft regularly returning to zero?
Could the business comfortably service debt if profit fell by 15%?
What debt do you want remaining in five years?
What debt do you want remaining when you retire?
Could existing debt interfere with succession?
If a major opportunity arose tomorrow, would you have the financial capacity to act?

Do you control your debt — or has your debt started controlling your decisions?

3P'S FUTURE PROSPERITY INSIGHT

PRESERVE

Good debt management helps preserve the cash and equity the family has created. Understand interest, repayments, cash-flow impact and whether each debt still serves a worthwhile purpose.

PROTECT

Debt creates risk through repayments, security and guarantees. Protection means understanding exposures, maintaining reserves and linking debt to business continuity and insurance.

PROSPER

Used intelligently, debt can enable property, productive assets, acquisitions and profitable growth. Prosperity is created when the expected return justifies the commitment and risk.

Instead of asking 'Can we borrow the money?', ask: Will this debt make our family business stronger, more valuable and more capable of achieving what we want in the future?

Not sure whether your current debt structure is helping or hindering your long-term plans? A debt review can provide clarity on cash flow, risk, retirement goals and succession planning. Book a meeting with the 3P's team to discuss your position and explore strategies to strengthen your family's financial future.

Disclaimer  

This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.  

Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder 

Liability limited by a scheme approved under professional standards legislation.