How Much Debt is Too Much?

Debt is a part of operating a business, especially in the portable restroom industry, where you rely on heavy-duty equipment with hefty price tags. While some debt is inevitable, it’s important to understand how much your business finances can bear.

With the right plan and good accounting software, you can make your debt work for you while avoiding a financial disaster. Learn the answer to how much debt is too much, then assess your portable restroom business to see where you stand.

Track Key Financial Data

In every part of your business, data is invaluable, and your finances are no different. At least once a month, you need to review debt metrics. But, if you’re already pretty deep in debt or experiencing payment problems, start tracking weekly.

Make financial projections using a report from your accounting software that uses a graph so you can see how your debt numbers look and catch any noticeable trends before you’re headed the wrong way. Examples of metrics to track include:

• Debt service coverage ratio (DSCR): Take your monthly operating profit divided by monthly debt payments. Ideally, your ratio should remain above 1.25.

• Account payable (A/P): This number reflects how much debt you owe to creditors. As this number increases, so does your debt load.

• Current liabilities: Found in your A/P report, current liabilities are short-term debt, which must be repaid within 12 months. Steep increases suggest a potential problem.

Know When to Say No

Although business finances aren’t a one-size-fits-all situation, it’s vital to recognize when you’re on shaky ground and make decisions accordingly. For instance, if you’re having trouble paying for inventory or payroll, that’s a red flag. Or, if your DSCR is trending upwards, that’s a sign that you need to address it before taking on new debt. Another sign of a debt problem is if your debt payments hold you back from reinvesting in your company.

A solution is to offer complementary services or products that don’t require a huge investment on your end. Use these sales to pay down existing debt while making long-term expansion plans. Other options may include refinancing existing debt or adjusting your invoicing terms for quicker customer payments.

Assess Finances Before Taking on New Debt

In many cases, some debt is essential to managing growth. Equipment loans are typically easier to get, whereas business loans determine eligibility using your DSCR. The Small Business Administration (SBA) may help you qualify for financing as well.

Before applying for funding, you’ll need your financial projections, including predictions based on historical data and potential revenue from future expansion made possible by debt. Keep a clear view of how new debt affects your monthly A/P and have a plan in place to start earning money with updated equipment.

Balance Risk With Reward

From slow times to unexpected large repairs, juggling your portable restroom operations budget is tricky. By getting into a good habit of keeping your eye on key numbers, you’ll be more aware of your debt load and understand the real cost of doing business.

Looking to Take Your Portable Restroom Business to the NEXT LEVEL? Download our FREE Guide: “Your Guide to Operating A Portable Restroom Business.”

Thinking About GETTING INTO the Portable Restroom Industry? Download our FREE Guide: “Your Guide to Starting A Portable Restroom Business.”