Zero-debt growth

Jeffrey Scott

Can you grow fast and still maintain a zero-debt company? The answer is undeniably yes. But it takes time, effort and saved-up capital before your growth will accelerate.

Why do contractors run debt free? They do it for peace of mind, better negotiating terms, stable home life, less money stress, personal philosophical reasons and simply because of habit. Here’s a look at some attributes of debt-free companies.

Zero-debt companies:
-Buy equipment and trucks; used equipment can be better than new.
-Keep owner’s income artificially low—at least initially, and it depends on growth.
-See high retained earnings.
-Don’t price out of fear. You have to sell to clients who will pay for your overhead, equipment and profit. No low-balling.
-Pay accounts payable immediately (in almost all cases). Relationships with vendors are strategic in nature; they become your partner.
-Are transparent with debt philosophy and use of profits. In fact, it’s used as a recruiting tool. Good employees who have been burned before will be attracted to your firm.

Should you convert? A company can make the switch, but it has to do three things: unwind its leverage (debt), build up a bankroll of savings and all the while finance its continued growth. This is the triple challenge.

To get started:
1. Fix your accounts receivable issues (get it down to 15 days—30 days for homeowners associations).
2. Ensure no maintenance or install contracts are upside down.
3. Set some benchmarks to measure weekly/monthly, for example: accounts payable under 30 days (and later to zero days) and have a bank line of credit only in peak months. Then build up a cash cushion to buy future equipment while you pay off current equipment debt.
4. Don’t worry about your mortgage (unless it’s variable, in which case you may want to accelerate payments.) Have a plan to pay off your other bank debt ASAP.

Photo: iStock.com/DNY59

Eye on the ball

It takes effort to switch, but it might be worth it depending on your circumstances. To be a successful zero-debt firm you must maintain high profitability and cash flow—this, of course, is good for any company. Aim for 16 percent net-to-owner (after depreciation) and save. The higher your retained earnings, the easier it will be to make the switch.

Zero-debt companies grow slow until they have built up a large head of steam. For example, I’m mentoring a multimillion dollar firm that had 15 years of slow, steady growth; but this year it had a 30 percent-plus jump in profitable growth. It takes time.

Purchasing becomes a balanced, strategic activity. On one hand, zero-debt firms wait until they can prove the need for a new piece of equipment before buying it; on the other, they have the cash to jump at an opportunity when it presents itself.

Naysayers will tell you (rightly) that you can grow faster with leverage—and that’s true in theory. Don’t just jump on the bandwagon of zero-debt; treat it with the seriousness of a religious conversion. Do it only if you are ready to change habits and only if your values align with this approach.

Is there a type of company best suited for the zero-debt way? No; rather, it’s a mindset. Company leaders must be efficient, cash smart, numbers focused, confident in sales, good savers, goal oriented; good negotiators, able to rent, risk averse and transparent with employees.

What if for one year you treated your business as a zero-debt firm? You would shift focus from growth to profits, cash, vendor relationships, employee buy-in, etc. How would you make decisions differently?

Featured photo: ©istock.com/DNY59