[MUST READ] Message from my mentor on good debt and bad debt
Good debt is debt that pays for itself. For instance, if you buy products to resell, if you invest in advertising that brings you customers to buy your product, if you train your staff so they can see more of your stuff, if you invest in traveling to meet with clients and you have to put it on a credit card this is all money that has an expected return on investment. You expect to get back far more than you pay.
Bad debt is where you spend the money, and it’s gone forever, like on furniture. We just closed our main offices because we’ve
reorganized our business. We opened offices that size but are much better designed for us as a digital business. Our employees wanted open space, modem furniture
Previously I had traditional offices, traditional deskfurniture paid tens of thousands of dollars for beautiful furniture any desks, all top-notch.
Now it was time to dispense with all of this, and we asked if anybody would like to buy it. They didn’t even want it for free. This is what you might call bad debt. In a couple of cases, we had to agree to pay to ship it over to them so they would accept it for free. The whole office was basically stripped down to nothing, and we didn’t make a penny on tens of thousands of dollars’ worth of stuff. That’s bad debt, there*s no return on it.
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We also made the mistake, as many companies do, of ordering too much product, because you think you’re going to sell so much,and then you don’t, but you still have to pay for the product You’ve got thirty- or sixty-day payment plans, and a warehouse full of product, and the products are not moving. Many companies go bankrupt because they stocked too much inventory. That’s another example of bad debt. Why would you do that? It’s because you can get lower prices if you buy in volume. But it’s much better at the beginning to buy smaller quantities, even though you pay higher prices and have lower profit. At least you’re. not exposed; your cash is not gone, and you don’t end up with a warehouse full of dead stock.
Dead stock and businesses, so that’s another place where you can get bad debt. You’ve got this stock, and if you don’t convert it into sales very quickly, it can drag your business down. That kind of bad debt is a major reason companies go broke.
MENTOR: BRIAN TRACY