Mar 21, 2024
Launching a business is a great way to generate wealth. But if the business is poorly managed and overleveraged it could rapidly destroy the owner’s financial future.
Jose from Dallas, Texas seems to be on the path to financial ruin. The 29-year-old personal trainer launched a gym but financed it exclusively with credit card debt and personal loans. “All of it's debt,” he admitted.
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“All of it's debt?! You didn’t save up any money to put into this thing?” host Caleb Hammer asked while looking at Jose’s finances on an episode of his podcast "Financial Audit." “That’s an interesting way to open a business."
Jose’s story serves as a cautionary tale for entrepreneurs looking to start a business without a clear idea of the risks involved.
Risky business
When one of his clients offered to loan him $50,000 to start a business, Jose jumped at the opportunity.
Unfortunately, this private loan was only enough to get the gym started. Jose used personal and business credit cards to finance ongoing overhead expenses and bought some equipment on financing. This relentless debt binge left him with roughly $57,945 in total borrowed capital.
Whether or not this risky investment was worth it remains unclear. Jose admitted he has a “bad habit” of mixing his personal and business finances. His best guess was that the business generates roughly $10,000 a month in revenue but he hadn’t calculated his gross margin or profits yet. “Dude, you’ve been in business for a year and you don’t know what your overhead is?” Hammer asked.
Since he isn’t tracking or managing his business finances appropriately, Jose seems to be exposing his venture to risk. A U.S. Bank study found 82% of businesses fail due to cash flow mismanagement.
Fortunately, Hammer believes there is a chance Jose can beat the odds and salvage his venture.
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Tough choices
Hammer believes Jose is on the path to financial ruin but has the opportunity to rescue himself. The first step is to separate his business and personal finances. Not only will this give him a better idea of his financial health but it will also make it easier for him to do his taxes.
With clear differentiation between personal and business accounts, Jose can now focus on consolidating his debt and potentially lowering his monthly interest payments. Given the current rate environment, this step should improve his cash flow considerably.
The final step is for Jose to stop working in the business and start working on the business. Instead of working long hours, Hammer recommended hiring some personal trainers on a commission-only contract to manage some clients. This should improve cash flow further and allow Jose to spend time on marketing and advertising to boost revenue.
Unless he implements these steps, Jose risks becoming part of a large cohort of failed entrepreneurs. “You might have to declare bankruptcy,” Hammer warned. “I’m scared.”
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
