Using credit to run a company

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    Using credit to run a company

    For personal finance I am aligned with Mr. Ramsey. If you cant pay cash, you shouldn't own it less its your mortgage which is within reason to your income. He also takes the position that companies should run on cash as well, which I agree with on principal. The past couple of companies I have worked at, the owners have openly answered my questions about cash flow, business model, a lot of details on how things function, etc which I am very appreciative of. I currently work for an industrial equipment OEM, mostly large refrigeration systems and gas compression systems for chemical process. Most of our jobs are 40-60 weeks schedules with budgets in the 1-5 million range. We usually have 3-5 projects going at a time, so the AP is pretty substantial as a each job has a handful of expensive long lead items.

    So for the people involved at the higher level of larger companies, what is the strategic purpose of leveraging credit when running a company? Is there a downside to taking a cash position in a company that does north of a 10 million a year? Is there a cross over point in the revenue number that would dictate the change? Does the type of business have an effect?

    #2
    I have no clue. But something I find interesting is this. Apple has something like 90 billion in debt. BUT, they also have something like 240 billion in CASH!

    So.... why don't they just pay off that debt? It must be strategic somehow, to keep the debt there? Tax reasons?

    Anyway, sorry, that's not helpful to your question.
    - Buck

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      #3
      debt is deductible...

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        #4
        Never use your own money.

        The dumb schmuck who’s trying to save a few dollars for retirement, fine pay cash. The people who accumulate real wealth do it through leverage.
        I've been falling so long it's like gravity's gone and I'm just floating

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          #5
          Originally posted by dnsfailure View Post
          I have no clue. But something I find interesting is this. Apple has something like 90 billion in debt. BUT, they also have something like 240 billion in CASH!

          So.... why don't they just pay off that debt? It must be strategic somehow, to keep the debt there? Tax reasons?

          Anyway, sorry, that's not helpful to your question.
          that plays into, because i have heard the same thing. i think google is cash positive as well.

          Comment


            #6
            I would say in theory if you can make more money off of a borrowed dollar then that dollar costs you, you should borrow every dollar you can. Clearly this comes with a risk component but lets say your company only had enough cash flow to finance one of those projects at a time by themselves. So for every project after that they are making profit minus financial costs at the expense of risk, which is free as long as you pull it off. How you decide you specific case and risk profile well that is where your business soars or sinks.
            WWJWD
            What Would John Wayne Do

            Comment


              #7
              Originally posted by dnsfailure View Post
              I have no clue. But something I find interesting is this. Apple has something like 90 billion in debt. BUT, they also have something like 240 billion in CASH!

              So.... why don't they just pay off that debt? It must be strategic somehow, to keep the debt there? Tax reasons?

              Anyway, sorry, that's not helpful to your question.
              Big business accounting rarely makes sense if you only glance at it. Really that "cash" they have is likely tied up in other liquid assets, like government bonds, that are kicking out some sort of profit to a subsidiary in some low tax shelter making a higher percentage then the current loan rates are costing them when factoring in repatriating the money into a higher tax area like the US. I guarantee someone with a high dollar degree has done and redone that math.

              Also sometimes it just makes sense to borrow a few billion dollars today at favorable rates for expense you see coming up tomorrow when the whole thing might turn to shit an no one will lend you a dime or it will cost you twice as much to borrow.
              WWJWD
              What Would John Wayne Do

              Comment


                #8
                Originally posted by xXClamhammer69Xx

                Yep. The down side is that it's easy to get buried if something goes off the rails a bit.

                Most companies have several levels of debt, long term capitol and operating. If you have a 10 million dollar order, and need 8 million to buy raw stock and 1 million in payroll to fill the order , that's operating short term debt. Now the 20 million dollar building you are working in and the machines in it are long term debt. Where things go south in most companies is not having enough cash balance to handle the payments if something goes south like orders being delayed, a order gap, kungfoo flu shuts them down for a while, slow year, etc.

                It's almost impossible to build a company without taking on debt. Even if you have cash, it's better to risk someone else's money if things go south. Trump got rich by leveraging other peoples money, not his own.

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                  #9
                  Originally posted by xXClamhammer69Xx

                  Yep. The down side is that it's easy to get buried if something goes off the rails a bit.
                  But you can feel however you want to about bankruptcy. It’s legal. Sometimes it’s even healthy. The law really doesn’t care about what morality you attached to it.
                  Last edited by grumpy356; 06-25-2020, 04:40 PM.
                  I've been falling so long it's like gravity's gone and I'm just floating

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                    #10
                    I've been thinking about this, I'm debt free, considering buying a skid steer and dump trailer on credit versus paying cash for used. Just kinda waiting and watching

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                      #11
                      I worked for an airline and my team decided what capital equipment to replace for a "small" segment of the business, $250million per year. My personal department operational slush fund budget was $2million. The way the finance team described it to me, because I asked the same questions as you, is borrowing money is cheap right now. They would use debt to finance capital projects and used a lot of the profit to buy back stock and fund raises and bonuses. This was good when times were good, sucks when shit goes south like you see now and they have a limited cash reserve. Companies also hold a high debt load to make them unattractive to takeover. Airlines are super capital intensive so they operate in kind of bizzaro finance world.

                      you are seeing companies put things on the credit card because interest rates are zero, and thus almost zero for the borrower. It's the corporate version of why pay cash for a new car, when I can finance it for .9% and use that car money to remodel the house that's an appreciateing asset. Thats a super super super simple analogy for the craziness that's corporate finance. We are also now seeing the results of that which is an economy being propped up by the fed, and this is also why QE by them is a terrible idea in the short, medium and long term.
                      Last edited by Slander; 06-25-2020, 04:41 PM.
                      Every major institution is against you and will let you die!
                      - Tim Dillon

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                        #12
                        I worked for good sized earth moving company, competitive with the nationwide guys for a third of the state, probably had 400+ pieces of cat equipment, and as far as I know was debt free. Owned by one guy, once he bought out his ex wife

                        Story was he boomed and busted in the 80s on credit and started over cash only. Ran a tight ship, had a powertrain rebuild shop in house, in house paint shop. Machines would cycle thru, get broken apart, mechanics would re hose, rebuild cylinders and replace bearings etc while the engine and tranny were getting rebuilt, once it wad back together and made a yard lap it went for paint and decals

                        always respected the way he did things

                        Comment


                          #13
                          Elecrical contractor I worked for used to go out and get a loan when he started a job, worked out okay till he keeled over from a heart attack. Last time I talked to his wife she was a cashier at Home Depot, she said she was just barely able through the sale of the company and some property they had to pay off all the money, and now she was back to work

                          Comment


                            #14
                            Originally posted by dnsfailure View Post
                            I have no clue. But something I find interesting is this. Apple has something like 90 billion in debt. BUT, they also have something like 240 billion in CASH!

                            So.... why don't they just pay off that debt? It must be strategic somehow, to keep the debt there? Tax reasons?

                            Anyway, sorry, that's not helpful to your question.
                            Apple has debt because it is cheaper to take out loans for their expenses than pay the taxes to move their cash out of their tax shelter.

                            Comment


                              #15
                              Dave Ramsey is a good guide for simple savings and life planning, but his philosophy leaves a lot of money on the table.

                              Comment

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