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You paid cash for everything when you started,so where you in debt?

Discussion in 'Business Operations' started by grandview (2006), Nov 20, 2012.

  1. Will P.C.

    Will P.C. LawnSite Senior Member
    Posts: 966

    I agree with the bloke who said to use credit whenever you can and use it correctly.

    Far more advantages using someone elses money than your own and is not something you can sum up in a tidy post.

    This will allow you to grow and become a 'fleet' of trucks and mowers rather than someone plateauing with 2 mowers and a beat up truck
     
  2. Duekster

    Duekster LawnSite Fanatic
    from DFW, TX
    Posts: 7,961

    "Use it correctly" is the catch and not often understood.
     
  3. Sean Adams

    Sean Adams LawnSite Gold Member
    Posts: 3,597


    Yes, this is correct.

    I will provide an example of a business owner I worked with for a few years.

    When I first met him he offered aeration only services, had a couple used aerators, paid cash for everything he had. His growth was mostly word of mouth and he took on the work he could handle. He had his business for about 5 years and he told me he consistently picked up about 50 customers per year, thus the 250.

    I asked him what his long term plans were. He said he did not want to stay in the business and wanted to sell and go back to school.

    I suggested he grow his business, and he said he had no money to do this. I suggested credit - as long as it was used responsibly he would be able to significantly increase the size of his business and when it did come time to sell he would have a lot more to walk away with. On top of that, if he made the decision to grow, his aeration income could be his only income since he also had a part time job.

    After a lot of back and forth, he finally took my advice. Three years later he had 2,500 aeration clients and sold his business.

    Do the math....

    When we met he had 250 clients and no debt. He was growing at 50 clients per year. So after three years he would have had another 150 clients, or 400 total, and no debt.

    Instead, he incurred around $88,000 in debt for equipment, trucks, marketing, etc. As I said earlier, in 3 years he grew his business from 250 customers to 2,500. Keep in mind he was also able to pay himself very well and was able to quit his other job.

    He sold his clients for $115 each on average (this included trucks and equipment) - total sale of his business was $287,500 less the $88,000 in debt he had and before taxes he walked away with $199,500.

    If he would have kept doing things his way, without using debt to grow his business, using the same numbers, he would have sold 400 clients for $115 each, totaling $46,000.

    Using OPM (other people's money) is the best way to grow a business.

    It still ultimately comes down to having a plan, not abusing the credit, and making sure you use the credit effectively.
     
  4. MDLawn

    MDLawn LawnSite Bronze Member
    Posts: 1,284

    Yep the money came from somewhere and needs to be repaid!!

    I know this isn't necessarily a lawn thing but I recently purchased a car to take me to and from my full time job to save me money on gas for not using my truck, it's an 80 mile round trip commute. I paid $2000 cash for it. But here's the thing, I need to pay back that money before I save anything! I figured it out to take me about 10 months of commuting to finally start saving money in mpg. Basically as highlighted in bold above it took me 10 months to pay myself back for the car, although based on saving gas mileage money. So I get what grandview is saying and completely agree that even if you use cash it's still a loan you borrowed from yourself. The money could be in the bank or invested instead of tied up in equipment. I'm all for splitting it if you have it. Say you have $10,000 saved up and need/want a new zero turn. If you want to put $5k down and finance the rest go for it. Less needed to finance plus money still in the bank. I'll take a low interest rate any day though to keep the cash in the bank. Especially on the basis of many being solo and not having $100,000's of dollars in the bank. Now if mom and dad stepped up and just out right purchased you a truck, zero turn, and trailer....you are well on your way!!

    I agree with Sean too....
     
  5. CowboysLawnCareDelaware

    CowboysLawnCareDelaware LawnSite Senior Member
    from DE
    Posts: 555

    As stated by many, it is nice to build up your credit using loans and such.

    Paying cash isn't debt, it's an investment in your future. If you think of it as debt you shouldn't run your own business of any style. :blob2:

    -Michael
     
  6. larryinalabama

    larryinalabama LawnSite Fanatic
    Posts: 16,245

    Even though I haven wrote a book Ill contuniue to run my business and life debt free, unless something happens thats out of my control.
     
  7. Patriot Services

    Patriot Services LawnSite Fanatic
    Posts: 12,441

    Hey Larry, off topic. Did you see your fellow Bamaniacs are heading to the Amazon to mine gold.
    Posted via Mobile Device
     
  8. larryinalabama

    larryinalabama LawnSite Fanatic
    Posts: 16,245

    Havent seen that, dont think they will leave now its "deer season"
     
  9. MDLawn

    MDLawn LawnSite Bronze Member
    Posts: 1,284

    I think the problem when talking about the cash vs using others money debate is that if you're a business that has $25,000 in the bank and choose to purchase a new dump trailer for $7500 with cash, no big deal you've still got money in the bank. I think too many are in the opposite place. They save up $7500 and purchase the same trailer with cash and it leaves $0 in the bank with no operating money. Sorry but I believe this is the majority of people living the second case. If cash is king, then having it in the bank account is paramount and not totally liquidating it into a piece of equipment.

    The other part of the problem is a lot of guys want to have a solo job vs a large business. As Sean stated in order for most business to get over the growth hump they need to borrow. So if you're a solo arguing with a 30 employee company about borrowing it's really apples to oranges. If its solo vs solo or large company vs large company then we have a better debate. And I said this in another cash vs finance debate thread. I read an article about this very topic in a landscape publication that compared 3 companies.

    Company A.) Everything cash, keep old equipment, hire a mechanic

    Company B.) Lease everything

    Company C.) finances new equipment and trades it in every 2-4 years.

    Three VERY different styles of running a business and each has one thing in common.…they were ALL very successful. But again they weren't comparing a solo job vs an employee run business. It was comparing equal size businesses.

    Here's my last thought. People cry about the "repo man". Well if you've got the money in the bank in place (vs spending it all with cash) then covering payments in a down time shouldn't be a problem. Just like the guy who spent all the cash for the equipment and has no payments. Both can sell their equipment too. Also if you're leveraging EVERYTHING you're a knucklehead. I'm not against cash, and use it to buy things all the time just as others who finance agree they use cash too. It's the cash guys who fight til the death about financing. Good grief.
    Posted via Mobile Device
     
  10. Blades Lawn Maintenance

    Blades Lawn Maintenance LawnSite Bronze Member
    Male, from Baton Rouge, La
    Posts: 1,233

    For me, being young I'd like to get my credit started so but as everyone said I think credit used wisely can be benifical
     

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