likely that they will be unable to meet their debt obligations if profitability de- clines,” Trower says. “Also, higher interest expenses could lead to higher payments, further limiting cash flow. Your lender(s) may be more reluctant to provide you with additional financing if you have too much debt.” Unruh says, in his case, his outlook became very short-sighted as he was worried about making payroll on Friday or what to tell a vendor who was demanding payment. “It makes it really difficult to do the long-


term strategic planning that is critical to moving past the current situation,” Unruh says.


METRICS TO MONITOR If you lack financial awareness, you should avoid adding on debt. “If you know on at least a weekly basis


what your profitability is, it is easy to correct issues before they put you out of business or require you to take out a (bad) loan to fund your operation,” Unruh says. Aside from monitoring your debt-to-eq-


uity ratio, Trower says the Debt Service Coverage Ratio (DSCR) demonstrates whether the company can generate suffi- cient income to satisfy its debt obligations. You can calculate DSCR using the chart below. Trower says that the Total Debt Service must be adjusted to account for the de- ductibility at the ownership level of interest expense. Your DSCR should be at least 1.25. O’Dea suggests monitoring your free cash flow and how it compares to the debt payments to ensure they are not taking up too much of the available cash flow. “This would then hinder the ability to


grow and invest back into the business,” O’Dea says. Unruh says your gross profit margin


(subtract material + labor from total revenue and divide by total revenue) is probably the single biggest indicator of how well your business is operating. “In most companies, your minimum


target benchmark should be 50%,” Unruh says. “In a seasonal industry, you tradition- ally have a limited window to make your


profit for the year, so you need to have this number dialed in and review it weekly.”


RIGHTING THE SHIP The good news is that even if you find your company drowning in debt, there are still ways to correct it. The first step is to take stock of the situation. O’Dea advises selling your lowest profit-producing assets that have positive equity to either eliminate payments or pay down debt. In Unruh’s case, he says the mindset shift


from what would be nice to what makes financial sense made a huge impact. “Take an unemotional audit of the fixed expenses you may have (however small) that you can operate the business without and cut them out,” Unruh says. “If it doesn’t directly contribute to your bottom line, get rid of it. Sell any equipment that you use for less than 200 hours per year and rent it when needed. Analyze your product lines and cut or raise prices on any services that aren’t profitable.” Unruh says he also turned over the cash flow management to his office manager, Stacy.


“I was terrible at this, but I thought I had


to do it!” Unruh says. Trower advises compiling a debt sched- ule that lists all your debts by interest rate and prioritize paying off high-interest-rate debt. You can then seek to renegotiate terms with creditors or refinance to get lower interest rates/consolidate your debt. “Compile a 12-month budget to assist with managing cash flow and determining if profitability will cover the debt service over the next year,” Trower says. Trowers says as a last resort, filing for


Chapter 11 bankruptcy allows the com- pany to restructure their debts to create a management repayment plan while continuing operations. If delinquent customers are part of


the reason your company doesn’t have enough cash flow to pay your debts, Trow- er encourages owners to always evaluate the creditworthiness of clients before entering a contract. “If you choose to finance customer debts, be sure to charge a market rate of


interest to avoid losing economic value over time due to the time value of money,” Trower says. Taking non-paying customers to small claims court can also be used as a last resort.


“Due to the informal nature of small


claims, most jurisdictions allow business- es to represent themselves without an attorney,” Trower says. “You will recoup your court costs in most cases, too, with a judgment.” O’Dea says if you wish to keep the rela- tionship intact, you can offer to help them restructure the debt in a way that gets you more money from them over time.


OPERATING DEBT-FREE On the other hand, it is entirely possible to operate debt-free. Trower and Unruh suggest operating this way early on, especially if the profitability is unpredictable. “To operate successfully with leverage,


you must know for certain whether you will have adequate profitability to service the debt,” Trower says. “Companies that are very cyclical, without stable profitability, may need to keep their debt very low.” Unruh says that healthy growth without


risky debt is certainly achievable. “It does take a small amount of patience


and recognizing, as Mike Andes of Augusta Lawn teaches, if you are in a growth mode or profit mode,” Unruh says. “Healthy businesses can switch between these two modes, but it should be intentional.” Unruh says they still have debt and he


is sure he’ll use it in the future. He says it’s okay to take a break from growth to focus on profitability, as profit is the gas that fuels your business. “There is great value in having very low debt, but being afraid to have any debt would result in missed opportunities, espe- cially with some rates on equipment being 0%,” O’Dea says. TE


KEYTAKEAWAYS


 Properly managed debt can be a valuable tool for growth, allowing businesses to invest in revenue-generating assets.


 Common causes of debt issues include over-le- veraging, poor financial


awareness, and unrealis- tic growth expectations.


 Monitoring metrics like Debt Service Coverage Ra- tio (DSCR), debt-to-equity ratio, gross profit margin, and free cash flow helps prevent debt from becom- ing unmanageable.


National Association of Landscape Professionals 25


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