by Tom Grandy
I graduated from Virginia Tech in 1973 with an industrial engineering degree. The objective of an industrial engineer is to find ways to do things faster, more efficiently, and less expensively. A few years after graduating, I went to work for an aluminum smelter in Hawesville, KY, which was about 45 minutes from my home in Owensboro, KY. I eventually became responsible for half of the maintenance control department. Shortly after moving into that position, it was apparent that we had two parts warehouses. One was on-site, which made perfect sense. The other, however, was located in Owensboro, KY – a 45-minute drive from the plant. That location made no sense at all. If a needed part was housed in the Owensboro warehouse, it took someone three hours (at minimum) to get the part by the time they drove 45 minutes each way, searched the warehouse, loaded the part, and probably stopped for a quick lunch break somewhere along the way.
I thought to myself, “It doesn’t take an industrial engineer to realize housing parts 45 minutes from the plant site makes no sense.” Even though the warehouse had been there for many years, and no one seemed concerned about it, the idea of eliminating it rapidly moved to the top of my priority list. We could eliminate the warehouse, save thousands of dollars a year, and increase efficiency. To my way of thinking, management would probably be so thrilled with the new found savings they would undoubtedly recommend a handsome bonus.
I created the study, estimated the annual savings and prepared a beautiful, multi-page, report pointing out the benefit of eliminating the Owensboro warehouse while consolidating all parts on site. The return on investment was amazing. The company would save over $100,000 a year by eliminating the Owensboro facility, not to mention the labor and time savings of not having to travel to Owensboro several times a week to pick up parts.
The project was presented to my boss, but it seemed to generate very little interest. That didn’t stop me; I simply began a grass roots effort to gain support for the closure. However, the results were similar to my bosses. There was little interest. After pushing my money-saving project for several weeks, one of the department managers pulled me aside and said, “Tom, there is something you need to know about the Owensboro warehouse.” In a very quiet, but straightforward, voice he simply said, “Tom, the plant manager owns the Owensboro warehouse.” Wow, no one had explained it to me quite that way before! The project didn’t just move down my list of priorities, it was removed from the list all together.
A fresh perspective really can make a significant difference!
When it comes to debt, a fresh perspective can also make a huge difference. The accumulation of debt within a business doesn’t happen overnight. One day the company needs another service van, so naturally the company buys one which generates an additional payment of $675/month. Sure, the company is still paying for the last van it purchased at $775/month, but hey, it will be paid off in another five years. Then there was the owner’s vehicle. Perhaps the owner should not have purchased that new $60,000 vehicle, but he spends a lot of time in his truck and works a lot of hours, so the least the company can do is buy him a nice truck.
Sometimes inventory runs low, and the company needs to purchase $10,000 worth of parts. No problem, we will simply “borrow” $10,000 on our line of credit. We can pay it back as soon as we win the bid on that huge project. Before long another emergency comes up, and another, until our line of credit grows to $75,000 and we are maxed out.
Now we owe Uncle Sam $35,000 in taxes, which we didn’t see coming. It gets expensive when we don’t pay Uncle Sam, so we will simply max out two more credit cards to pay the bill. Oh, and that darn weather. We were hoping for an outstanding season (depending on the trade) to get all that debt paid off, but the weather just did not cooperate and sales were actually less than the same season last year. No big deal; our suppliers will understand that we will be a bit late paying our bill. Before long our supplier debt has increased to $85,000 and the company finds itself on COD.
In less than three years, the company now finds itself in a lot of debt, as summarized below.
- Van #1 ($775/month x 12 months): $9,300/year
- Service van ($675/month x 12 months): $8,100
- Owners vehicle $710/month x 12 months): $8,520
- Pay Line of Credit Off in Five Years ($75,000 divided by 60 months, with some interest = $1,500/month): $18,000
- Two Credit Cards to pay off tax bill ($35,000 / 60 months at 18% = $950/month): $11,400
- Pay Off Suppliers $85,000 over 60 months, with interest, would be about $1,700/month: $20,400
Total Debt Payment/Year = $ 75,720
To state it another way, the company is in debt $350,000 to $400,000.
Those little bumps in the road didn’t seem all that big until it was all summarized in one place.
Debt can, and will, eat your lunch! Let’s project getting totally out of debt within 5 years. That will give us a number we can work with. We will assume the two van payments, and owners vehicle will each be paid off in 5 years.
I want to suggest several things:
Summarize All Your Debt – Make a physical list of all your debts. Simply seeing your total indebtedness in black and white can, and should, be an eye opener.
Create A “Specific” Repayment Plan – Take a look at each individual debt and make a specific plan to pay it off. Plan on paying off loans early. For distributors, taxes or lines of credit determine how quickly you want it paid off. If its five years divide the total debt by 5 years, throw in some interest, and add it to your overhead.
Catch A Vision Of What Being Debt Free Would Look Like – Seeing light at the end of the tunnel can be very energizing. If the sample company above could stick to their five year plan they would have all $350,000 to $400,000 paid off. However, the best part is that $75,000+ of debt repayments, currently in the budget, would no longer exist which means the $75,000 will become additional profit. What could you, or your company, do with an additional $75,000 each year!
Build Debt Repayment Into Your Pricing – Wanting to get out of debt won’t make it happen. The cost of debt repayment is just like rent, utilities or insurance. It is a cost of doing business that can, and should, be paid by the customer, in the form of your pricing. Now think for a minute. What will happen when you build the additional $75,000 into your pricing? Your pricing will go up. Paying off debt with existing pricing almost never works. To eliminate debt, your pricing must go up!
Stop Borrowing – Lastly, learn from your experience. You worked hard for five full years to get out of debt. Make a commitment to stay debt free. Holding back your new found $75,000 for even two years would create a saving account of $150,000. Use that money to make additional purchases rather than borrowing!
Ignoring debt has the ability to put you out of business. Make a plan to become debt free, stick with it, and enjoy the fruit of your labor.
