One of the key principles that allows you to achieve personal financial independence is the notion of good debt and bad debt. You target investments that allow you to create deductions, negatively gear and use other people’s money to get ahead through the value of the compound effect.
The flip side of this is bad debt. That debt is not deductible, it does not allow you to get ahead financially nor does it leverage equity. This includes examples like your house mortgage, private loans and your credit cards.
How does this concept apply to business? Is there similar concepts in business as good and bad debt? How would it apply and how do you ensure you are building a great business rather than focussing on areas that will not create “good debt” that will lead to equity, revenue and profit growth?
It comes down to what you believe will give you the greatest competitive advantage in your industries. What will make you successful long term? What good debt investment will pay handsome returns down the track?
Some of the key areas I see as good debt in a business include:
- Training and development of your staff. It not only grows your people which are your biggest asset but it will grow your business because you are empowering staff to think like business owners and to lead without title. It also reduces a dependency culture on key staff, executive and owners.
- Automating your systems and processes. It saves your time, energy and frees up your team to be creative by reducing the time spent on non-value activities.
- Delivering well to your existing clients. Your marketing spend, your business development initiatives and delivery focus should be primarily focussed on your current clients. They become your marketers, your advocates who are passionate about what you do. Focusing on future or possible clients to the detriment of providing outstanding value to your current clients takes you away from the value of repeat work and referrals.
- Improving your products and services. By investing time in developing your content, your services and your products so that you stay ahead of the game and your competitors, it means that you continue to identify other opportunities to provide additional services to your current clients.
- Investment in yourself. As a business owner or executive, we tend to put everyone else first in the area of development. Learning and improvement are two key attributes I see in highly successful executives and business owners. This requires a focus on training, reading, improving and learning from others. Every time you read or learn something new, it leads to rewiring of the brain and improvement because you have learnt a new concept or initiative. This is a critical attribute to adapting to change and continuing to innovate during these times of increased globalisation of our industries.
What is good debt in your business? Are you clear on where you are spending in bad debt areas? Identify these areas, be decisive in reducing bad debt spend and be prepared to invest in your good debt and watch the value of the compound effect over the long term. Your organisations balance sheet, staff and clients will thank you for it!