Digging out of a hole of debt
How quickly time flies! It seems like yesterday that the escrow closed on my business in January of 2007.
This month’s question has to do with a cleaner who has a major debt problem. The person sent the following in an email: “I have been losing money over the last couple of years due to falling sales and, I think, too much labor. Some of my help have been with me a long time so I hate to cut their hours or lay them off.”
Does that sound familiar?
He went on to say, “One of my suppliers has put me on COD, my credit cards are maxed out, and the health insurance company is threatening to cancel. What should I do?”
This is really a difficult situation for this cleaner. I suggested he first start with his credit card debt because of the incredibly high interest rate he is being charged.
My recommendation was to look for a credit card that offers low interest rates for balance transfers. I saw an ad in the paper that offered zero interest for 18 months on balance transfers. The cleaner is fortunate that he has equity in his home and that the mortgage has been paid in a timely fashion. It is a good thing that his wife has a high paying job.
The next step was to make a list of all the vendors he owes money. I told him to use an Excel spreadsheet because we would be doing some sorting.
After every vendor is listed with the amount owed, sort the list by the amount of money owed.
From that list, the little debts are paid first. They go at the top of the list. The cleaner now has a complete picture of how much he owes and who he owes it to.
The next step was for the cleaner to list all of his average monthly costs, such as rent, utilities, supplies, insurance etc. Then he added gross labor to that subtotal and subtracted the total amount from average monthly sales.
What is left over is what has to be used to pay off the vendors. If there is nothing left over to pay the vendors, he has to reduce any cost that was variable.
His labor cost was too high. As difficult as it was, he had to make a decision: cut hours or lay off people to reduce the payroll and gain the necessary dollars that will enable him to pay off the debt. It is a shame our government does not do this, but I will not start on that subject.
Because his sales have stopped dropping, we were able to work out an action plan.
Step 1 was labor reduction. I suggested he lay off his highest paid employees or work out some kind of pay reduction that satisfies both parties.
Step 2 was the handling of credit card debt.
Step 3 was to contact the vendors and tell them you will start paying part of the past due portion of their bills on a monthly basis.
If a vendor starts getting pushy you might explain that if he gets too pushy you will consider filing for bankruptcy and they will not get any money. That usually stops the person who handles collections.
The key is to stick to your planned pay off of the past due bills.
After the smaller bills are paid, there will be additional cash available to pay the larger vendors. This is a snowball effect.
I know it works, because I faced a similar situation when I was in business. My problem stemmed from overstaffing and not reaching projected sales. For my efforts in turning my company around, I was given an award by Methods for Management for Outstanding Achievement.
Being in debt is not an easy situation to overcome. You are forced to make difficult decisions such as layoffs or cutting hours. The main thing is you keep track of your expenses and pay down the old past due debt.
It’s in a cloud
The next question is from another cleaner. “What’s all this cloud stuff I keep reading and hearing about?”
I explained it had to do with using a server owned by the company with whom you are doing business.
“How safe is this server?” he asked. “I don’t want anybody getting my customer list.”
I explained that the data was encrypted and it was very safe. Cloud computing is the wave of the future.
I told him that I back up my computer in the cloud. The data is on the backup company’s server. If I need to access it with another computer I can. Best of all, there is no limit on the amount of data the company I deal with will store.
Soon software manufacturers will have you doing all your work in the cloud. You will not have a need to install software in your computer. Computers will then shrink in size and cost. You will have a solid-state hard drive to handle anything you want to store on your machine. I love the new technology.
The man next asked, “What’s all this social network stuff?”
I asked him if he used the Internet. He said, “Rarely.”
I then inquired if he had a website. I expected him to say “no” but he did not. He said, “My son put up a website for me, but I don’t think it does much good.”
Here is another cleaner who lives in the past. I did not want to start analyzing his website unless he retained me. I asked him if he knew about Facebook or Twitter. This time my expectation was fulfilled when he answered with a resounding “No!”
I tried to explain how those social networking tools worked, but I think I was talking to the wall. Some people never want to change.
I find the biggest obstacle is fear of the unknown. Rather than attempt to learn and keep up with technology, it is easier to say, “My sales are dropping and I don’t know why.” You might say the boat has sailed and left this passenger on the pier.
Bill Gates said the following, “If GM had kept up with technology, like the computer industry has, we would all be driving $25 cars that got 1,000 MPG.”
Think about that statement. Are you using cloud computing in your business? How do you back up your data? Do you have a Facebook page? Are you asking your customers to be your fans on your Facebook page?
If you are doing none of the above, it is time to make changes in your company and the use of the newest technology.
Harvey Gershenson operates Sterling Drycleaning Consulting and is a former owner of Sterling Dry Cleaners. A second-generation drycleaner, he has been in the industry since he was in high school. He has served as president of the Cleaners and Dyers Guild of Los Angeles and has served on the boards of directors of the Drycleaning and Laundry Institute and the California Cleaners Association. He is also a guest lecturer for the California Department of Corrections. He can be reached by e-mail at email@example.com or phone at (310) 261-2623. His web site is drycleanerconsulting.com.