Debt is a financial instrument that can make or mar an investor. It’s nearly impossible to operate a business without being involved in one form of debt or the other. Debt in this term can also refer to the usage of Other Peoples’ Money (OPM) in operating an enterprise.
There are different forms of debts; for the purpose of this article, we will be narrowing our focus lights on the good debts and bad debts.
- Good debt: Good debts are debts optimally utilized for the purpose it was borrowed for in the first place. Such debts include money borrowed to expand a business, to invest in real estate, to invest in intellectual properties that will pay back the invested capital on the short, mid, and long runs, stock markets, it also includes money borrowed to operate an enterprise at a higher level, amongst others.
Such debts can be easily paid off in the long run without affecting the business adversely. Good debts when fully optimized can take the enterprise to its next level. Such debts also include money borrow to open new business offices.
2. Bad debts: These debts are classified as bad debts because they are more like the sunk cost in economics. These debts cannot be recovered again. Bad debts include money borrowed to marry more wives, money borrowed to merry with friends and families, money spent on girlfriends and side-chicks amongst others.
Causes of Bad Debts
Bad debts are caused by a lot of prevailing factors. These include;
- Poor spending habits: This simply means spending beyond your means. This is more prevalent amongst our youths where they spend to woo side chicks, girls, and to feel among when they are with their peers. People spend on things that they don’t need just to massage their egos and to feel big.
- Unexpected emergencies: Unexpected emergencies such as ill-health, natural disasters such as inferno outbreaks amongst others also lead to bad debt. People tend to spend on these emergencies as against their planned outlines.
- Impulse buying: Not easily differentiating between wants and needs and one not having enough financial education leads to bad debts. Lack of financial literacy and poor investment knowledge are some of the most causes of bad debts.
- Lack of budgetary allocations: Not making proper budgeted plans for one’s needs and inadequate investment plannings are some of the sure ways to fall into bad debts. It is highly recommended for investors to plan, organize, and execute their plans optimally.
How To Avoid Bad Debts and Optimize An Enterprise Scare Resources
It is highly recommended for investors to keep improving their financial knowledge daily to fully optimize their scare resources uses. Some of these include;
- Read financial books: Top-notch investors and managers such as Bill Gates, Jeff Bezos, Warren Buffet, and, Tony Elumelu are voracious readers. There are numerous self-help financial books that are recommended for investors to read. These include top classics such as; Rich Dad, Poor Dad by Robert Kiyosaki, The Richest Man in Babylon by George Samuel Clason, Your Money or Your Life By Vicki Robin, and The Total Money Make Over By Dave Ramsey amongst others.
- Attend Seminars and Workshops: Attending top-notch events and listening to tapes, podcasts on money management, and other personal finance traits are ideal for investors to feed their minds on positivities.
- Have a mentor: It is also highly recommended for investors and potential investors to have mentors. These mentors will help to shape their managerial skills directly or indirectly.
- Learn the business intrinsic: Learning the intrinsic of the business that one planned to invest fully on will also help to optimize the enterprise’s scare resources and to avoid unnecessary debts. It is highly recommended for one to test the waters before investing hugely in the business.