Debbie's Debt: Tackling Cash Flow Problems

Sep 11, 2017

Karen met Debbie when their kids had started kindergarten together and had developed a life-long friendship.

They both had a passion for crafts. When their last child was in school, they decided to start a home craft party business together. At first they offered craft classes and would sell supplies to students in the class. Their first year wasn't a big money maker. They joked that they were able to help buy Christmas presents, but didn't provide more income than if they had a part-time job at the fast-food restaurant.

While the first year, was marginally successful, Karen and Debbie continued to grow and had now created a real business by their third year. Somehow they had managed to book 50 neighborhood parties at $500 per party and were netting $10,000 in profit each. Debbie wanted to take their craft business to the next level. Debbie felt that, if they borrowed money, they could build their own store and eventually expand the stores into a national franchise. Karen was apprehensive to borrow money. 

What if they couldn't make the loan payments? What would happen to their homes? The risk wasn't worth it. Karen wanted to continue to grow their home party business without borrowing money. They decided to go their separate ways. Debbie would borrow money to build her dream; and Karen would try to grow her home party business with no debt.

Debbie went to the bank to ask for a loan to open her first craft store. The banker asked all of the usual questions that bankers ask:

  • How long have you been in business?
  • What is your annual free cash flow?
  • How much revenue do you make in a year?
  • What profits do you make to pay back a loan, if I were to give you one?

Apparently, Debbie gave the wrong answers to all the banker's questions, because the banker politely turned her down. He claimed that he would be a fool to loan her money for a dream that had no chance of success.

Debbie refused to let go of her dream and thought that she could partner with a large cookware company that held parties in homes. She thought that if she could leverage their contact lists of people over the entire nation with her idea for craft parties, she could earn the money to support her life long dream of starting a craft store chain.

She immediately presented her new idea to Karen to see if they could be partners once again. Karen reviewed Debbie's business plan and it involved putting a second mortgage on their home in order to develop the new business. Once again, Karen refused the deal; and said there was no way she'd put her family in such financial risk.

Debbie was disappointed that her friend wouldn't join her, but continued her quest to build her dream business. She borrowed $40,000 to launch her vision. The money would be used to purchase large amounts of craft supplies, legal fees, and travel costs for contract negotiations with the large cookware company. As Debbie watched the money evaporate from her checking account, she continued to work diligently to get revenue from her new idea.

Just when Debbie's business was getting traction, her husband, Jack, was offered a new job in a state far from their home; and they moved away.

While Karen and Debbie stayed in touch, Debbie was reluctant to talk with Karen. Every time they talked, Karen expressed her concern over Debbie's debt and created unwelcome fear and doubt. Debbie decided to limit their communication to Facebook posts.

When Debbie and Jack sold their home in the move, Jack realized they had more debt than he felt comfortable with. Jack's new job paid better and they were able to move into a community with lower home prices, so it seemed to work out. However, Jack insisted that Debbie hire a business coach to help her with her business. They agreed that if they would be taking on this level of debt, Debbie needed to be certain she would get their money back.

Debbie's first conversation with Coach Russ was guarded. She felt like he would tell her the same things that Karen had been saying all along. She was a fool for putting their family's financial future on the line for her silly craft business. Debbie explained her situation to Russ. She had borrowed $40,000 and had partnered with a national cookware chain to do craft parties in homes. So far, her business had $600,000 in revenue in 50 different communities. The national cookware company was taking 10% of her revenue at $60,000 so she was left with $540,000 to pay $200,000 in commissions, another $200,000 in craft and shipping supplies and $100,000 in expenses. While her business seem to show a profit, she had was strapped for cash because she had to pay suppliers, and party hosts in advance of receiving payment for craft purchases. Meanwhile, she was being pressured to borrow even money more to pay the bills.

After listening to her story, Coach Russ spoke, "I'm so impressed with the business you've created, Debbie."

She was surprised by Russ's reaction, "But what about my money problems?"

Russ corrected her, "You don't have money problems, you have cash flow problems. Cash flow problems are quite common for any growing business."

Debbie seemed somewhat relieved and now felt compelled to tell Russ her real business dream, "Russ, I guess I'm a little disappointed that I'm not doing better. You see, I wanted to start a national chain of craft stores."

Debbie knew that Coach Russ would start laughing as she saw a smile form on his face. He surprised her, "Debbie, I think that's a splendid idea. How did you want to transition your relationship with the cookware company into your national craft store chain?"

"I thought that I'd make a lot of money so that I could afford to purchase my first store. But as you can see, I don't have cash; and I'm struggling to pay off my silly $40,000 loan. I was careful in dealing with the cookware company so that I could retain rights to my brand and still have access to their customer lists. I even made sure they would not share in my craft store. Not that any of that matters, if I can't even open one store."

"You have an excellent idea, but you need to learn a little more about how to manage money. I understand that you're apprehensive about debt, but debt in business is a normal part of the way businesses operate."

"Are you suggesting I borrow even more money and get my family in more debt than we are now?"

"I'm not suggesting anything, yet. The way you've described your business model, I think we can fix your current cash flow situation so that you can pay down your personal debt. I also think that we can create a financial plan that will help you start on the dream of opening your national chain of craft stores."

Debbie left Russ's office in a great mood. She'd been told by her friend, Karen, and her husband that she was causing harm to her family with her reckless use of debt; and all-of-a-sudden, a business professional was telling her that she may need to take on more debt, and that she was an "Impressive" business woman.

Over the next few months, Russ worked with Debbie to improve the cash flow in her home craft party business. She was able to charge in advance for craft supplies, pay commissions after supplies had delivered and was generating cash for the first time ever. She managed to double the business she was doing with the national cookware company with increased sales.

The next step was daunting. She wanted to open a national chain of craft stores, so it was clear she would have to once again borrow money.

Debbie met Russ at his office early on a Friday morning and started the conversation, "The last time I went to the bank to ask for a loan, they laughed at me. I felt so foolish. Why will it be any different this time?"

Russ asked, "Why did the bank turn you down the first time?"

"They asked me all kinds of financial questions about free cash flow, revenue, experience; and I didn't know the right answers to give them."

Russ smiled, "You may not have had the right answers then, because you didn't have the right reality. What kinds of answers would you give to those same questions today?"

Debbie smiled, "I'm guessing that's what you will tell me, today."

"I'll help you with the answers and I'll help you understand the nature of debt, but you'll give the banker the truthful answers that will get you the money you need."

Russ explained that the nature of borrowing had more to do with collateral and not as much with the prospects of business success. It was important that the bank made sure they got their money back on the loan; but the bank would be more concerned about what would happen if you didn't repay the loan. Russ explained that banks consider a loan for a building quite differently than a loan to start a business.

Debbie was able to get her loan from the bank with ease. She bought her first craft store in her home city and was excited to execute her idea of a boutique craft store that sponsored parties in the store. She was smart enough to set up her contract with the cookware company to avoid branding conflicts. She felt like such a shrewd business woman.

Just as she had hoped, the new store made money. She learned how to manage cash flow in the store from her previous experience with the home party business. With Russ's help, Debbie learned how to document what went well in her pilot store; and what ideas were duds. They decided that a franchise model would work best to expand her chain of stores to other states where Debbie had great name recognition with her home craft parties.

Debbie never forgot her friend, Karen. She offered Karen a franchise and waived the franchise fee. Karen loved that her friend thought about her; and Debbie was secretly glad that her idea to open her national franchise had come true even when she was warned by others that she wouldn't be able to pay off her debt. It turned out that Debbie now had over $2,000,000 in debt, but was quite happy with revenues that exceeded the costs of her new craft franchise empire.

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