As a new business owner, there are many things that you need to understand before you jump into the marketplace. Foremost among them is a sound knowledge of income and expenses. On a rudimentary level, income should always exceed expenditure to allow a business to operate in the black. Even with leverage, a business should guard against overextending itself with financial obligations i.e. liabilities.
One of the most useful resources to employ in this regard is a debt quiz. Here are some of the questions you should understand on a personal and business level:
- What is your monthly expenditure on food and drinks? (Groceries, eating at restaurants and alcohol). The US national average is $587.
- How much do you spend every month on housing? (Rent or mortgage, utilities including gas, electricity, and water). The US national average is $1,420.
- How much to spend every month on apparel? (Clothing and shoes). The US national average is $142.
- How much to spend every month on transportation? (Vehicle purchases or lease repayments, insurance, gasoline, and public transportation). The US national average is $750.
- How much to spend every month on healthcare? (Insurance, doctor visits and medical services, prescriptions, and supplies). The US national average is $587.
- How much to spend every month on entertainment? (Concerts, movies, theater, events, pets, hobbies etc.). The US national average is $216.
- How much to spend every month on cash contributions? (This includes alimony and child support, contributions to educational, political organizations, religious institutions etc.). The US national average is $162.
- How much do you spend every month on insurance and pensions? (This includes personal insurance, life insurance, Social Security, and pensions). The US national average is $464.
Overall, the US average debt is $48,420, and based upon your income stream, you can evaluate where you are on the spectrum.
A debt quiz is akin a rudimentary budget. It lists all the expense items, and allocates categories to each component of your overall expenditure. As an individual, or a business, this is sacrosanct. Without a clear understanding of how your funds are going to be allocated, it’s impossible to run a business operation with any degree of success.
It should be noted that for-profit and not-for-profit operations require maximum efficiency. Budgetary constraints apply across the board, and only companies with a clear understanding of resource allocation can succeed in a competitive marketplace.
Ways to Manage Debt Effectively
Whether you’re running a one-man show, or a multinational corporation, it is imperative that debt is effectively managed. This begins at grassroots level with the lines of credit you have available to you.
Be advised that personal loans, business loans and credit cards (personal or business cards) play a big part in expense management. Credit cards with 0% APR for 12 months – 18 months are preferable to credit cards with high APRs (annual percentage rates). Additionally, if a business has a petty cash account, that should be used to defray the expenses in credit card purchases for the business.
By paying off a credit card in full every month, it is possible to enjoy the benefits such as cash back (between 1% and 3%), frequent flyer miles, time-sensitive discounts and so forth. Another benefit of paying off cards as quickly as possible is that interest is not paid on interest. Since revolving credit is a major expense item, it is best to tackle this debt issue head on.
Various other options are available such as debt consolidation loans to ‘consolidate’ similar debts like credit card debt with a single loan that covers the full amount of the overall debt at a lower interest rate.
Conclusion
Entrepreneurs must safeguard their most valuable assets such as human capital and financial capital, since these are the drivers of growth and prosperity. One of the first steps is by learning how to manage your debt well. Get started today.