Every business encounters operational costs – the money it takes to keep the business running day to day. Some industries have higher overheads than others, but every business owner has a set of expenses he or she has to overcome. There is a big difference between business expenses and business debt though, and understanding that difference will allow you to stay out of debt in the long run. Here is a comparison of debt and expenses so you can figure out how to make the most out of your monthly income.
Defining Your Business Debts
Your debts are any balances that you have to pay over a long period of time. There are many different types of debt that you may encounter, including revolving debts, installment debts, secured debts, unsecured debts, source-specific debts, and more. Your credit cards, property payments, business loans, and car payments are good examples of your debts. Any time you have a balance that you are trying to pay off, you have a debt.
Defining Your Business Expenses
Your expenses are payments that you make without actually paying off a long term balance. These may include your utility bills, rent payments, insurance premiums, and fuel costs for a month. Some of your expenses are predictable from month to month, and others will vary based on what you buy. Your fuel costs, for instance, will change based on the price of gas and the amount of traveling you need to do in a month. Your property payments will stay the same, regardless of changes in the economy.
Prioritizing Your Revenue To Pay Off Your Debts
For the most part, your expenses need to be paid off before your debts. That is because your expenses keep your business operational, like your utilities or your wages. With that in mind, you should have a plan in place to eliminate your debts over time so everything you earn from the business is pure profit.
If you only make the minimum payments on your business debts, you will pay an enormous amount of money in interest alone. Set aside part of your earnings each month to cover the principle balances on your debts. There are several ways to approach this:
- Snowball Method: Pay off the smallest debt first, and then progress upward until you just have one debt left to pay off.
- Interest Method: Pay off the debt with the highest interest first to avoid excessive interest fees.
- Blanket Method: Pay off all debts in equal amounts across the board until the smaller ones naturally fall off.
- Saving Method: continue paying the minimums on your debt while saving money to pay off the balances. Once you have saved enough to cover a lump sum, pay that off and move on to the next debt.
The strategy you use to pay off your business debts will depend on the types of debt you have and the way your business earns money. Turn these debt payments into bills and hold them at the same priority as your expenses. With this mindset, you should be able to clear your debts quickly and enjoy much higher profits in the long run.