Credit Matters Blog

They Are Racing - The Great Cashflow And Profit Verses Debt Race

Kim Radok 12 November 2017


There is sufficient evidence to suggest we live in a world where there are extreme pockets of strong business optimism plus growth or alternatively, negativity with a poor business environment. Consequently, optimists are spouting the good times ahead, the doomsayers are preaching the onslaught of Armageddon, and a third group, are advising to look for business opportunities with a degree of caution.

Who is right? Well, it doesn't really matter. The problem we are all facing is that everybody is being held to ransom due to the size of today's global debt.

As the prevailing groups advance their theories on the business environment, many people are forgetting the Great Race which we all face. This race is between earning enough income plus sufficient profit or cash left to pay existing debts before the debt burden grows in excess of our ability to pay it. Almost every borrower and finance provider will be affected negatively if Debt wins this race.  

If you are a borrower

A borrower's future is always dependent on their ability to have enough income to survive, plus pay their debts. Although interest rates are low now, there is the possibility of rate rises in future. Any increase in interest rates therefore, may compromise a borrower's ability to repay their debts.

Furthermore, despite advocates saying there is good debt and bad debt, irrespective of the type of debt, there are other issues which stand out which are often forgotten.

A business may incur a debt to help the business grow and is worth considering because the interest component of the repayment is tax deductible. As an experienced accountant first told me however, an expense has to be paid for and you do not get back 100% of the expense as a tax deduction.

Equally important, every debt has to be repaid. If you don't repay the debt, there are serious financial and emotional consequences.

If you are a financier

A business extending B2B credit may not consider they are a financier because extending credit is classed as a business tool designed to increase sale. The fact is however, by extending credit to customers your business is now a financier. That no identifiable interest is earned as for a bank, is immaterial.

As a financier, the issues your business face are the same as for a bank. In either case, outstanding invoices, like loans, are only assets if they get paid. If your customers run out of cash and cannot pay, these assets are lost, as are your future cashflow and profits.

To conclude, in the great "Cashflow And Profits Verses Debt Race", all financiers and borrowers are at risk if their customers lose their debt race. The size of global debt today, means no single country, business or individual can escape the consequences if Debt wins the race as all borrowers and financiers are interrelated in some manner today.

Consequently, it should be the focus of every individual and business to reduce their debt or ensure their debt (defined as good debt) adds value to their situation. Once this state of affairs has been established, building cash reserves must be a priority. If Debt wins the Great Race, it is those individuals and businesses that have minimised their debts and have cash, which will come out best.