Understanding Money, Management and Marketing: The 3Ms of Successful Small Business Venture

Understanding Money, Management and Marketing: The 3Ms of Successful Small Business Venture

  by James Gaius Ibe, Ph.D., CAE.

What is the business entity concept? How do you minimize the age of account receivables? What accounts for the high failure rate of small businesses? How can a small business owner ensure a higher probability of success? The answers to these questions are vital to the ongoing debates about the best ways to assist the main engine of job creation in the US economy. Additionally, entrepreneurs who undertake new business ventures should proceed with a known probability of success. In this three parts series we explore the 3Ms of successful small business venture. Please bear in mind that the following are merely guidelines and in no way constitute formal business advice. They are designed to provide general information regarding the subject matter covered. Laws and practices often vary from state to state and are subject to change. And because real-world situations differ markedly, specific illustrations may not be applicable. Please consult a competent professional for specific business advice.

Many non-business majors such as architects, dentists, pediatricians, and lawyers, etc go through college without taking any business courses. However, upon graduation they become small business owners of private practice. These deficiencies are then made up in a hurry through on the job training or hiring business managers. However, without a working knowledge of the fundamentals, small business owners become totally dependent on business managers. Agency problem arises when the interests of business owners are divergent from the interests of business managers whether they full-time employees or outside help. Agency problem aside, small business owners must understand what the numbers mean to provide effective leadership and control. We will discuss the role of appropriate business systems and functional areas of business under management principles.

A preliminary review of failed small businesses indicates a common pattern: Lack of attention to the 3Ms of business enterprise: Money, management and marketing. Additionally, many small businesses ignore the business entity concept: The activities of a business should be recorded separately from the activities of the owners. Indeed, the personal activities of a small business owner should be separate and distinct from the activities of the business entity. Many small businesses get into trouble for failure to draw this distinction, particularly with respect to cash flows and uses of cash derived from business operation.

Understanding Money

There are some basic principles a small business owner should know about money. First, small business owners must consider sources of capital-equity or debt. The appropriate mixture of equity and debt is referred to as optimal capital structure. This has consequences on the return on equity. Where can a small business find seed money or additional funds to grow the business? Many small business upstarts use their personal savings. There are government grants available. Please see your local SBA office. For many small business resources and information please go to http//:www.sba.gov.However, with a good credit history, a local bank may be willing to extend credit. There are more creative sources of funds such as venture capital beyond the scope of this article.

Second, small business owners must know how the business money is being used. An accurate record of cash inflows and outflows is essential for successful operation of a small business. An effective accounting system is the best way to accomplish this goal. All financial transactions must be journalized. A financial statement is required and consists of income statement- a summary of the revenue and expenses for a specific period of time, such a month or a year; statement of owner’s equity-a summary of the changes in owner’s equity as of a specific date, usually at the close of the last day of a month or a year; balance sheet-a list of the assets, liabilities, and owner’s equity as of a specific date, usually at the close of the last day of a month or a year and statement of cash flows-a summary of cash receipts and payments for a specific period of time, such a month or a year. These statements are needed to determine whether your efforts are paying off. Unfortunately many sole proprietors do not understand that it all about cash flows. Banks, other creditors, stakeholders and industry experts are interested in these numbers, you should be as well.

 PART 2:

In this three parts series we explore the 3Ms of successful small business venture. As I have already explained, please bear in mind that the following are merely guidelines and in no way constitute formal business advice. They are designed to provide general information regarding the subject matter covered. Laws and practices often vary from state to state and are subject to change. And because real-world situations differ markedly, specific illustrations may not be applicable. Please consult a competent professional for specific business advice. A preliminary review of failed small businesses indicates a common pattern: Lack of attention to the 3Ms of business enterprise: Money, management and marketing.

Understanding Management: The key functions of a manager include planning, organizing, coordination and control. Management success is gained through accomplishment of mission and objectives. Managers fail when they do not achieve their mission and objectives. Success and failure are tied directly to the reasons for being in business, i.e., mission and objectives. However, accomplishing mission and objectives is not sufficient. Success requires both efficiency and effectiveness. While efficiency refers to producing at the lowest cost possible, effectiveness is getting the mission and objectives accomplished. For example, cost overruns are indications of inefficient operation. Planning is key function of a manager. T he ultimate measure of management's performance includes: execution-how well management's plans are carried out by members of the organization; leadership- how effectively management communicates and translate the vision and strategy of the organization to the members; and delegation-how well management gives assignments and communicate instructions to members of the organization.

Effective management requires the development of a business model. This is an integral part of any enterprise. A business model is a path to a company’s profitability, an integrated application of diverse concepts to ensure that the business objectives are accomplished efficiently and effectively. A business model consists of business objectives, a value delivery system, and a revenue model. The path to shareholders’ value maximization goes through customer value maximization, so delivering value to the customer is absolutely crucial. An effective revenue model consists of a set of revenue streams that contribute to the company’s profitability. The company must maintain a well balanced portfolio of multiple revenue streams without losing focus of the core business. Indeed, without a clear vision and effective revenue model, there is no clear path to profitability. For additional information please go to http//:www.sba.gov.

Additionally, effective contemporary management requires a global perspective. Globalization produces a tension between standardization and customization. Adaptability is not functional when it is not purposeful and informed by environmental scanning, environmental analysis and costs/benefits analysis. Note carefully, that for every strategic choice a company makes, there are costs and benefits. The pertinent question is: do the benefits justify the costs? Successful companies choose the optimal strategy that maximizes the net benefit to the enterprise. Globalization and technology have intensified competition in all markets and depressed profit margins in most industries. However, some successful companies such as Wal-Mart and Walgreens continue to perform well. The key is to think globally and act locally. The tension derives from pressures to reduce cost and pressures to be locally responsive. In balancing standardization and customization, successful companies formulate and execute appropriate and optimal strategies pursuant to its strategic mission and objectives. At global level, companies choose international, multi-domestic, global, or transnational strategy. At corporate level, they choose diversification-related and unrelated executed through internal new venturing, acquisition or outsourcing. At business level, they choose cost leadership, product differentiation or niche/focus strategy. In part three, we will summarize the principles and mechanics of marketing. 

PART 3:

In this three parts series we explore the 3Ms of successful small business venture. Again, please bear in mind that the following are merely guidelines and in no way constitute formal business advice. They are designed to provide general information regarding the subject matter covered. Laws and practices often vary from state to state and are subject to change. And because real-world situations differ markedly, specific illustrations may not be applicable. Please consult a competent professional for specific business advice. A preliminary review of failed small businesses indicates a common pattern: Lack of attention to the 3Ms of business enterprise: Money, management and marketing.

Understanding Marketing:

Marketing function consists of a series of activities undertaken by a firm to relate profitably to its customers. A firm’s ultimate success in the global marketplace depends largely on its ability to perform the marketing function efficiently and effectively. This requires adequate knowledge of the market dynamics: who are its prospective customers? Where are they? What do they buy? From whom do they buy? When, how and why? To create and maintain competitive advantage, a firm should be the best able to identify and satisfy the needs of its customers better than the competition, both domestic and global. Firm grasp of customers’ product adoption process is vital.

Identifying the needs of potential customers is not sufficient. Understanding market dynamics alone is critical but not sufficient. To create and maintain competitive advantage, a firm should anticipate and effectively respond to the market dynamics-shifts in customers’ demand and preferences and the attendant competitive responses. Relevant, accurate and timely marketing intelligence is critical. However, accurately forecasting market demand is difficult but essential to the formulation of efficient and effective marketing strategy. As Pride and Ferrell (2003) points out, while marketing is the process of creating, distributing, promoting, and pricing goods, services, and ideas to facilitate satisfying relationships in a dynamic environment, marketing management is the process of planning, organizing, implementing, and controlling marketing activities to facilitate exchanges efficiently and effectively. Successful firms efficiently and effectively integrate marketing strategy and overall corporate global strategy: International, multi-domestic, global and transnational.

In practice, marketing strategy involves a plan of action for developing, distributing, promoting, and pricing products that meets the needs of the target market(s). Marketing strategy requires that marketing managers focus on four fundamental tasks to accomplish the stated objectives: (1) target market selection, (2) marketing mix development (4Ps), (3) marketing environment analysis, and (4) marketing management. Indeed, to best satisfy the needs of the target market(s) requires an effective coordination of marketing programs-a set of activities formulated around the marketing elements (4Ps: product, price, promotion and place), that allows the organization to achieve its stated goals. The overriding purpose of marketing strategy is to create and maintain competitive advantage. Additionally, the timing must be consistent with the calculus of economic advantage. Finally, a firm through its strategic planning process should clearly articulate its organizational mission and goals, corporate strategy, marketing objectives, marketing strategy, and marketing plan. The formulation and execution of an effective marketing plan allows a firm to accomplish not only its marketing objectives and goals but its overall corporate goals consistent with ethical marketing decisions that foster mutual trust in profitable marketing relationships. 

ABOUT THE AUTHOR: Dr. James Gaius Ibe, is the Principal-at Large of the Global Group, LLC-Political Economists and Marketing Management Consultants; and a senior professor of Economics, Finance and Marketing Management at one of the local universities.

Wealth Creation Strategies: Planning for Financial Security and Better Retirement

Wealth Creation Strategies: Planning for Financial Security and Better Retirement
Prof. James Gaius Ibe, Ph.D., CAE.

Life expectancy is getting longer for most people. However, the usual sources of retirement benefits-government and employers are getting out of that business. Therefore, individuals must now more than ever take full responsibility for their own financial security and a worry-free retirement. Wealth is like a tree that bears edible fruits. You plant the seeds, nurture them, and they bears fruits. You carefully separate the seeds from the fruits. What you may eat are the fruits. You plant the seeds again and wait for the next harvest. If you discard the seeds, fail to separate the fruits from the seeds or to plant the seeds again, you should not expect another harvest. If you learn this metaphor and teach them to your children, then you, your children and grand children can expect many harvests. In finance we have fancy names for this process-savings, investments, dividends and dividend re-investments. Wealth and poverty transfer from generation to generation. However, while poverty transfers automatically, wealth requires careful planning. People generally do not plan to fail, they fail to plan.

Effective wealth creation strategies consist of at least three components: personal finance planning-savings and investments, risk management-tax avoidance and insurance, and estate planning-retirement and asset preservation. Please consult a competent professional for specific advice. The following are some general guidelines for wealth creation and planning a better retirement:

1. Set your retirement financial goals: Decide how much you need to retire in comfort consistent with your values. Draw up a retirement budget to make sure your plans are realistic as possible. There are financial calculators at bloomberg.com or kiplinger.com to assist you to determine how much you need to set aside now to attain your financial goals at retirement.
2. Find additional money to invest: Develop a monthly budget and live within it. Effective cash flow management requires that you track all monthly income and expenditure. Identify “frivolous” expenses and divert any extra money into your retirement portfolio.
3. Begin saving and investing early and often: Starting early, saving and investing as often as possible will prevent more inordinate financial sacrifices to attain your retirement financial goals later in life as you get closer to retirement. The earlier you start the smaller and easier the required contributions to your retirement portfolio to attain your set goals.
4. Protect your retirement nest egg: More people are living longer as health and nursing home insurance premiums are increasing rapidly. Long term care contracts (insurance) may be necessary to protect your retirement savings from catastrophic health expenses. Younger and healthier people should seriously consider the Health Savings Account (HSA) as part of their portfolio.
5. Guaranteed income for life: A sensible use of fixed annuities may assist to ensure that your retirement savings will be with you for a long time. Instead of a lump sum, your insurance company guarantees you a monthly check for the rest of your life. Additionally, consider reverse mortgage which converts the equity in your home into a steady stream of tax-free income.
6. Participate in your employer’s retirement plan: Most employers have retirement plans that match employee’s contributions. The long-term power of tax-free compounding is one of the secrets of wealth creation. Begin as soon as you become eligible to participate. You may be able to use Individual traditional Individual Retirement Account (IRA) or Roth IRA to set aside additional funds toward your retirement.
7. Estate Planning: Creating wealth is important to ensure that you retire in style. However, effective wealth preservation strategies are crucial to ensure that your survivors do not face financial hardship once you pass on. It is not wise to leave the interests of the dead to the benevolence of the living. Begin with a will to document your intentions regarding your assets.

Update: The personal bankruptcy law has changed since the last article. Please see a summary of major changes to personal bankruptcy law at AbiWorld.net.

ABOUT THE AUTHOR: Dr. James Gaius Ibe is the Principal-at Large of the Global Group, LLC-Political Economists and Marketing Management Consultants. He is also a senior Professor of Economics, Finance and Marketing Management at one of our local universities.

Effective Pricing Strategies for Small Businesses: Some Guidelines

Effective Pricing Strategies for Small Businesses: Some Guidelines by Prof. James Gaius Ibe, Ph.D., CAE. 

What are the primary goals of a small business? What are the primary goals of effective pricing strategies? What are the core elements of effective pricing strategies? The answers to these questions are markedly different depending on whom you ask. For example, many graduate business students and practitioners identify profit maximization as the primary goal of a business. Therefore, they assume in error that effective pricing strategies must focus on profit maximization. While profit maximization is a legitimate strategic business goal, for several reasons the primary goal of a business is survival at least in the short run. Indeed, when businesses overlook this reality and make profit maximization their primary goal, they tend to engage in conduct and strategies that threaten their very existence. The relevant literature is replete with modern examples such as Enron, Global Crossing, Ameriquest, etc. The overriding aim of this article is to highlight some basic economic theory and practice of effective pricing strategies. This article provides general guidelines for establishing effective pricing strategies. For specific pricing strategy formulation and execution please consult a competent professional.

In practice, management attempts through pricing to recover the costs of the core elements in the marketing mix-the product, promotion, related advertising and personal selling expenses; and the various services provided to the customers by the members of channels of distribution as well as to generate adequate cash flows to profitably operate the business. Further, price sends differing signals to various stakeholders-customers, existing competitors, potential competitors, employees and regulators. For example, if the price is too low profit margin may be unsustainably low and prospective customers might think the product is inferior; and if it is too high the firm might price its products out of the relevant market segment. Establishing appropriate pricing policies and strategies is a critical part of the overall corporate and marketing strategies and requires adequate knowledge of the key pricing objectives and the price elasticity of demand. The core elements of effective pricing strategy should include the value of the product to prospective customers, the price charged by key competitors, and the costs incurred by the firm from new product idea generation to commercialization.

Some Key Pricing Guidelines:

Effective pricing strategies depend on various factors such as pricing objectives, the price elasticity of demand, competitive position and the stage of the product life cycle. Key pricing strategies may include penetration, parity and premium or skimming. Penetration pricing strategy is most effective when demand is elastic and involves charging below competitors’ prices to create scale economies as a key method for building a mass market or to deter potential market entry due to low price and profit margin. Parity pricing strategy is most effective when demand is unitary and the product is a commodity; and involves charging identical prices with competitors. Premium pricing strategy is most effective when demand is inelastic and involves charging above competitors’ prices to recover R&D costs quickly or to position the product as superior in the minds of the customers. When survival is the primary goal-for instance during a recession or initial entry into a market segment, a business may seek to simply break-even: P = AR = ATC. The business sets its price-average revenue equal to average total cost or cost per unit of output. Break-even analysis is a common technique for evaluating the potential profitability of a marketing alternative. The break-even point is that level of sales in either revenues or units at which the firm covers all its costs. Indeed, at break-even total sales revenue equals the total cost necessary to generate these sales: FC/CM that is, fixed cost divided by the contribution margin or SP-VC (selling price-variable cost).

Alternatively, break-even may be computed in terms of sales revenue by simply multiplying the breakeven units times the selling price or FC/ [1- (VC/SP)]. Additionally, if a firm wants to know how many units or sales revenue that will produce a given level of profit, profit (P) may be added to the fixed cost as follows: (FC + P)/CM or (FC + P)/ [1-(VC/SP)]. Further effective pricing strategy should carefully evaluate the various product attributes that influence pricing such as the competitive position in the market segment, uniqueness, perishability and the stage in the product life cycle. And while cost oriented pricing methods have the advantage of simplicity, marketing practitioners point to obvious drawbacks such as ignoring demand factors, competition and a high probability of starting a price war. Careful appraisal of price elasticity of demand may minimize these deficiencies. However, as in all business decisions there are costs and benefits, the relevant economic calculus is whether the benefits justify the costs.

Regardless of market structure-degree of competition, t he output level where MR = MC is always best, whether the firm is making an economic profit, breaking even, or operating at a loss. A small business seeking to minimize costs should operate at the output level where P = MR = MC = minimum ATC -the price is equal to marginal revenue, and the marginal cost; and to the minimum of average total cost. This is a very useful economic principle because when a small business is incurring profits-it maximizes profit where MR = MC and when a small business is incurring losses, it minimizes loss where MR = MC. Finally, a small business should not automatically shut down because it is incurring economic losses. The shut-down principle: P< AVC -the price (average revenue) is less than the average variable cost. That means the business is not generating sufficient cash flows to cover variable costs and make positive contributions to the fixed costs. Indeed, by shutting down the small business limits its losses to its fixed costs. Please note that fixed cost is sunk in the short run, whether the firm produces or shuts down.

ABOUT THE AUTHOR: Dr. James Gaius Ibe, is the Principal-at Large of the Global Group, LLC: Political Economists and Marketing Management Consultants; and a senior professor of Economics, Finance and Marketing Management at one of the local universities.

Effective Leverage and Optimal Capital Structure

Effective Leverage and Optimal Capital Structure

Prof. James Gaius Ibe, Ph.D., CAE 1
 
How do small firms choose their capital structure? When is it appropriate for a small business to fund its operations with borrowed funds? What is the nature and function of effective leverage in financial management? These questions relate to the optimal capital structure of a business enterprise-the appropriate mix of debt and equity that maximizes the return on investment and shareholders’ wealth while minimizing the cost of capital, simultaneously. Clearly, effective leverage is vital to a sound business strategy designed to maximize the wealth producing capacity of the enterprise. In these series on effective financial management, we will focus on the pertinent financing strategic questions and provide some guidance. The overriding purpose of this article is to highlight some basic financial theory and industry practice in effective financial leverage. For specific financial management strategies please consult a competent professional.
Please note that the appropriate amount of financial leverage for each firm differs markedly based on the overall industry dynamics, market structure-level of competition, stage of industry life cycle, and its market competitive position. Indeed, as with most market indicators firm-specific leverage position is insightful only in reference to the industry expected value (average) and generally accepted industry benchmarks and best practices.
Types of Leverage:
Financial Leverage: Degree of financial leverage is the ratio of the EBIT/EBT-earnings before interest and taxes divided by earnings before taxes. When a business relies on borrowed funds for its operations-the financial leverage is created as the business incurs fixed financial obligations or interests on the borrowed funds. A given percentage change in the firm’s operating income (EBIT) produces a larger percentage change in the firm’s net income (NI) and earnings per share. Indeed, a small percentage change in operating income (EBIT) is magnified into a larger percentage reduction in net income. The degree of financial leverage (DFL) measures a firm’s exposure to financial risk or the sensitivity of earnings per share (EPS) to changes in EBIT. Therefore, DFL indicates the percentage change in earnings per share (EPS) emanating from a unit percent change in earnings before interest and taxes (EBIT). In general, a firm’s short-term financing needs are influenced by current sales growth and how effectively and efficiently the firm manages its net working capital-current assets minus current liabilities. Note that ongoing short-term financing needs may reflect a need for permanent long-term financing including an evaluation of the appropriate mix and use of debt and equity-the capital structure.
Operating Leverage: Fixed operating costs, such as general administrative overhead expenses, contractual employees’ salaries, and mortgage or lease payments create operating leverage and tend to elevate business risk. The impact of operating leverage is evident when a given percentage changes in net sales results in a greater percentage change in operating income (EBIT)-earnings before interest and taxes. Operating leverage is calculated as follows: DOL = CM/EBIT-contribution margin divided by earnings before interest and taxes or percentage change in EBIT divided by percentage change in sales (revenues).
Combined Leverage: Degree of combined leverage (DCL) is the combination of the effects of business risk and financial risk. Degree of operating leverage (DOL) and degree of financial leverage (DFL) combine to magnify a given percentage change in sales to a potentially much greater percentage change in earnings or operating income (EBIT). There is a direct relationship among the degrees of operating leverage (DOL), financial leverage (DFL) and combined leverage (DCL). A firm’s degree of combined leverage (DCL) = DOL X DFL or CM/EBIT X EBIT/EBT that is CM/EBT. The degree of combined leverage (DCL) may also be calculated as percentage change in EPS divided by percentage change in sales that is the percentage change in earnings per share emanating from a unit percent change in sales volume.
Optimal Capital Structure: This is the appropriate use of debt and equity that minimizes the firm’s cost of capital and maximizes its stock price. Please note that a non-optimal capital structure or lack of optimal debt and equity mix may lead to higher financing costs and the firm may reject some capital budgeting projects that would have increased shareholders’ wealth with an optimal financing. Further, the effects of different capital structures and differing degrees of business risk are reflected in a firm’s income statement. Please note that operating leverage tends to magnify the effect of fluctuating sales (revenues) and produce a percentage change in operating income (EBIT) larger than the change in sales (revenues) while financial leverage tends to magnify the percentage change in EBIT and produce a larger percentage change in EPS. Therefore, a change in sales (revenues) through operating leverage affects EBIT. This change in EBIT through the effect of financial leverage subsequently affects EPS.
Some Useful Guidelines:
When a firm grows, it needs capital which may be funded by equity or debt. Debt financing has costs and benefits. Debt has two significant benefits: Interest paid is tax deductible, which minimizes debt’s effective cost; and debt carries a fixed charge, so stockholders do not have to share their net income if the enterprise is extremely profitable. On the other hand, high debt ratio indicates higher risk and hence higher cost of capital; and if the firm fails to earn sufficient income to cover its fixed charges it must produce the shortfall or face bankruptcy.   Therefore, firms with volatile earnings and operating cash flows must limit their use of debt financing. Certainly, effective cash flow and leverage management is critical to prudent and sound strategy designed to maximize the wealth producing capacity of the enterprise. Additionally, strategic analysis, market analysis and financial analysis should be internally consistent and congruent. The EBIT/EPS analysis allows a firm to evaluate the effects of different capital structure on operating income and the level of business risk. The variability of sales or revenues over time is a basic operating risk. Please note that in capital budgeting for a specific project to increase shareholders’ wealth, it must earn more than its cost of capital or hurdle rate.
In practice, firms tend to use target capital structure-a mix of debt, preferred stock, and common equity with which the enterprise plans to raise needed funds. And because capital structure policy involves a strategic trade-off between risk and expected return, the optimal capital structure policy must seek a prudent and informed balance between risk and return. The firm must consider its business risk, tax position, financial flexibility and managerial conservatism or aggressiveness. While these factors are crucial in determining the target capital structure, operating conditions may cause the actual capital structure to differ markedly from the optimal capital structure. Therefore, the target capital structure should be used as a guide toward an ideal capital structure that minimizes the weighted average cost of capital (WACC) while maximizing the shareholders’ wealth.
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1. Dr. James Gaius Ibe is the Principal –at Large of   the Global Group, LLC-Political Economists and Marketing Management Consultants. He is also the professor of record in Economics, Finance and Marketing Management at one of our local universities.

Where You Spend Your Money Is Important

Where You Spend Your Money Is Important Prof. James Gaius Ibe, Ph.D., CAE.

Everyone wonders why some neighborhoods or communities are prosperous and other are beset with economic and social decay. Though the problems are complex and the causes are debatable, some solutions are quite simple.

Where you spend your money is where you create jobs. When you create jobs, you create opportunities and better economic conditions that uplift the whole community or neighborhood. Simply put, increased spending leads to increased output, increased output leads to increased employment, increased employment leads to increased income, increased income leads to increased spending. The secret is in what economist call the money multiplier effect.

The multiplier effect is a basic economic concept, which refers to how many times an injection of original spending circulates through a local economy such as a neighborhood or community. As a result of re-spending, it benefits the whole neighborhood or community. The multiplier effect works through changes in the level of economic activities throughout the whole economy. When a spending injection into a economy leads to an increased national income more than the original injection, this is the multiplier effect. Indeed, the multiplier effect is the effect from continuous re-spending of incomes.

We are aware of the reasons why people choose not to patronize businesses in their neighborhoods and communities. Whatever your reason, just remember that where you spend your money is important and the multiplier effect works in the opposite direction also: Decreased spending leads to decreased output, decreased output leads to decreased employment, decreased employment leads to decreased income, decreased income leads to decreased spending.

In sum, if you want to do something about economic stagnation in your neighborhood, consider creating jobs in your neighborhood by spending money at your neighborhood stores. As regarding profit and cost margins, if other people can come into our neighborhoods and make legitimate money, we can certainly make reasonable money by starting businesses in our neighborhood.

ABOUT THE AUTHOR: Dr. James Gaius Ibe is the Principal-at Large of  the Global Group, LLC-Political Economists and Marketing Management Consultants. He is also a senior Professor of Economics and Marketing at one of our local colleges.

Debt Management Strategies: Coping with High Debt

Debt Management Strategies:
Coping with High Debtby James Gaius Ibe, Ph.D., CAE.

What are the consequences of failing to repay your debts? What should you do when you are faced with mounting debts and can’t pay your bills? Are there alternatives to bankruptcy? What are the different types of bankruptcies? When are they appropriate? The answers to these questions are pertinent to the agonies people go through when debts get out hand and frustration sets in. Before you despair get the facts.

The consequences of failing to pay your bills are severe in more one way: You could get a bad credit rating which limits your ability to borrow in the future. Further, subsequent borrowing when available would be in a sub-prime market with the attendant high interest rates. Additionally, your wages may be garnished. A court may order your employer to pay up to 10 % of your salary each pay period to those creditors who have obtained court judgments against you. In some cases, creditors may sell property you used as collateral to secure the loan. Note carefully that if you are sued and you lose the case, you may be required to pay the creditor’s legal cost as well, in addition to your own legal cost and amounts you owe. Finally, you may be forced into bankruptcy if you fail to come to reasonable and credible plan with your creditors to repay your debt.

What is Personal Bankruptcy?

Bankruptcy is the filing of a petition with the bankruptcy court to obtain protection from collection efforts of your creditors. It is normally triggered when an individual’s debts exceed current income and property. At the end of bankruptcy, some or all of the individual’s debts will be canceled. Bankruptcy involves a Federal court proceeding in which the individual’s obligations are balanced against his or her creditor's rights. The individual’s objective is to reduce or eliminate the debt completely ("wipe the slate clean"). The creditor's objective, on the other hand, is to collect as much of the debt as possible. The bankruptcy proceeding is the forum in which the debtor and the creditor resolve differences.

Are there alternatives to bankruptcy?

Congress has recently passed a bill that will make it a bit more difficult for some people to obtain bankruptcy. Though many people file bankruptcy to deal with their debts, just as many shy away from bankruptcy and consider other solutions to straightening out their debt problem for good reasons. Bankruptcy tends to severely damage your credit rating. It also may remain on your credit files for about seven years and in some cases longer. There are a number of different strategies for handling debt.

Restructuring Debt Without Bankruptcy:

If you can’t live within your means then contact your creditor(s), ask for their cooperation, and try to work out different payment arrangements or options. For example, if you are overwhelmed by credit card debt, get in touch with the creditors, explain the situation, and ask to temporarily reduce your minimum monthly payments, waive late charges, and extend the payment period – with smaller payments at "no" interest. A second recommendation is to turn to the Consumer Credit Counseling Service, a nationwide nonprofit organization that will work with you and your creditors to devise a more manageable repayment plan suited to your cash flows. A third might be to sell any of your assets that have a resale value and apply the proceeds to your debt. Any balance due can be negotiated with the creditor. Finally, another solution is to consolidate all outstanding debts into a single loan (often through credit card balance transfers and home equity loans). This approach relieves you of being saddled with debt from multiple creditors, since you will be making payments only to one lender. 

What Are The Various Types of Bankruptcies? 

Chapter 7 is the most severe, can be used by all individuals and businesses. All unsecured debts are terminated, and are paid if any money remains after secured creditors are paid and after various exemptions permitted by law are claimed by the debtor.

Chapter 13 is typically used by wage earners and small businesses; this delays and reduces amount of payments to creditors over a period of time; this is known as a Chapter 13 Plan, or an individual reorganization.

Chapter 11 is used by larger businesses, and resembles a Chapter 13, with many more requirements. If all you need, is a plan to pay off your debts, then a Chapter 13 or Chapter 11 is preferable, rather than a

Chapter 7, particularly if you intend to reestablish your credit worthiness.

ABOUT THE AUTHOR: Dr. James Gaius Ibe is the Principal-at Large of the Global Group, LLC-Political Economists and Marketing Management Consultants. He is also a senior Professor of Economics and Marketing at one of our local colleges.