How Much Debt Is Enough? Too Much?

If you make a big equipment or software purchase (or even acquire another shop) and need time to ramp up sales, having debt spike to more than 10 percent could be a good strategy as long as the sales come. But, if capital costs continue at this level indefinitely, the business may not be as profitable as one would like.

If the business has a rapidly growing sales trend for several years and it requires continued investment in technology or people to make it happen, there might be an exception...the old “make it up in volume” strategy.

It would take a book to adequately deal with this topic, but in conclusion, I have found that businesses that stay in that 5-10 percent debt range, over time, do a pretty good job of keeping the business healthy and produce good profitability and cash flow at the same time. Short-term high or low spikes also work. Of course, there are ways to manage those levels by refinancing debt or paying down loans when cash allows. This needs to be viewed with a lot of commonsense.

I also want to point out that my experience is coming from operations in the $1-5 million sales range in the small commercial printing market. I am not so sure that these same guidelines would hold true for larger commercial operations, but I suspect they would.