Debt to Net Worth – The Pros and Cons of Leverage

Debt to Net Worth – The Pros and Cons of Leverage

Be Sociable, Share! TweetAn old bank customer of mine called me the other day. He was wondering whether he should borrow to finance an impending, but temporary, shortfall in cash flow later in the year. He had sufficient personal cash to inject to get over the hump. I advised him that he was better off in this case using leverage rather than an equity injection. Why? Simply put, leveraging the bank’s balance sheet to fund the temporary shortfall left him with cash for opportunistic inventory purchases, which could increase profits dramatically. Using all available cash removed that option. This is our second article on financial statement ratios and what they mean. The Debt to Net Worth Ratio Debt to Net Worth (also known as Debt to Equity) is the ratio of total liabilities on the balance sheet to owner equity. A company that had $500,000 of liabilities to $100,000 of owner equity would have a Debt to Net Worth ratio of 5/1. For every dollar the owner has in equity, the company owes five dollars to creditors. That would be considered highly leveraged. In some start ups, where the owner is injecting only 10% equity and the bank is financing the rest of the start up capital requirements (nearly always with an SBA guaranty) Debt to Net Worth can be 10/1. Most banks subtract intangible items like goodwill from the owner equity to get a ratio called Debt to Tangible Net Worth. What The Debt to Net Worth Ratio Means It is generally assumed that as companies mature, their Debt to Net Worth will improve over time. A company that...
FWS Weekly Business Roundup n.3

FWS Weekly Business Roundup n.3

Be Sociable, Share! Tweet It’s the beginning of June and it’s finally warming up here in the great Northeast.  There’s less than a month of school left for the kids.  Summer vacation plans are all the buzz at the virtual watercooler, and everyone is prepping for the great Summer business slowdown as offices become ghost towns and beach resorts is where things are happening. What better time is there to start looking at some of the tools you use, and to leverage some great ideas and inspiration from others to improve your small business.  Welcome to the Fair Winds Strategies Weekly Business Roundup, third edition. Managing Projects and Lists in a small business → I’ve been using Trello for a long, long time.  First of all, it’s free, and it’s a great small business tool.  You create a “board”, and then create multiple “lists” on the board.  You then populate the lists with “cards”.  Each card can contain checklists, group comments, attachments, due dates, people, voting and more.  As cards are updated, members of the board are updated.   Let’s look at a quick example of how I use it.  When we work with clients, we have a 200+ question checklist we go through to assess our client’s business.  How do we add questions to that list, but do it in a team way?  In Trello, we have three lists – general discussion, proposed questions and approved questions.  Everyone adds the questions they like to the proposed questions list and the rest of the group comments and votes on the questions.  The questions with the highest votes then move into the...
FWS Weekly Business Roundup n.2

FWS Weekly Business Roundup n.2

Be Sociable, Share! Tweet Another week, another roundup, another bunch of resources.  If you’re looking for anything in particular, leave a note and we’ll post our favorite answers in the next couple of weeks. Startup Forms → Business templates are great.  They give you a starting point for creating your own documents and can often save thousands of dollars in legal costs.  Even though this site is focused on documents for startups, we find that many small businesses are missing some of these forms.   Sample Pitch Deck → Once again, it’s great to have a starting place when you’re creating a content rich document.  This is a great template that walks you through creating a pitch deck for your company.  Don’t just think seed, angel or venture funding when you look at creating a pitch deck.  They are wonderful for presenting information to banks during the lending process, and parts of them can be used for customer facing presentations too!  SAFE Documents → Convertible notes are so last year.  Simple agreements for future equity (SAFE) are what’s in.  These documents solve some of the tax and balance sheet implications that convertible debt introduces, and they are fully vetted and ready to go!  Twitter Hashtags We’re just getting into social media here so it will be a bit before we start reporting on our own best practices.  In the meantime, here’s how we hashtags to use when we’re tweeting.  This site has all sorts of ways to look at trending or related hashtags. Most popular hashtags → Related hashtags → Website Marketing Grader → Are you doing everything you should be doing for “on page” marketing...
Contact Us!
  • This field is for validation purposes and should be left unchanged.
×