Buying Risk

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Polish Warszawa pickup truck at Muzeum Inżynie...

Image via Wikipedia

I recently read a post on the Frugal Dad blog entitled, “Borrowing Money is the Same as Buying Risk”. Though the blog is all about the journey of getting out of personal debt and living on less than you make, I believe the topic is just as true for business.

In his post, the Frugal Dad discusses choices for purchasing a used pickup truck that will cost $18,000. He can finance the purchase through his local credit union at 2.99%, draw the cash out of his emergency fund savings, or purchase a new pickup for $25,000 at 0.00% interest. He elaborates on each of those choices listing the pros and cons of each option. He goes on to say that what is missing from the mathematical calculations is risk. Borrowing money always involves risk (even at 0.00% interest)! Drawing down from emergency savings also involves risk. As he states in his post, “What if I got sick and had to live on long-term disability?”

Jesus spoke similarly in Luke 12:16-21 regarding the rich man who tore down his barns and built bigger ones to store all his grain. In verse 20, God said to him, ‘You fool! This very night your soul is required of you; and now who will own what you have prepared?’. (NASB) Though this parable is often associated with Jesus’ teaching about greed, it also presents the point that we do not know what tomorrow will bring. If the rich man (business man) was borrowing to fund the building of his bigger barns (warehouse, office building, delivery vehicle, copier machine, etc.), and his soul were required of him before it was paid for, who will own what he has prepared?

Drawing the cash out of your emergency fund to make the purchase may drop the level of cash reserve to an uncomfortable level, thus increasing the risk of not being able to weather a slow period or crisis. If you’ve ever stayed awake at night wondering how you’re going to pay your bills, that’s stress you just don’t want to go through again.

So what’s the best option? The Frugal Dad gets it right – Do Nothing! Wait. Save up cash above and beyond your minimum cash reserves and pay cash for your purchase. If you need a new truck or piece of equipment because your current one is beyond repair, find a used one (that will get you by) for a lot lower price, pay cash, and move up later. It’s best to keep saving until you have enough to pay cash without touching your necessary cash reserves. You’ll also be able to get a better deal.

Even if you don’t have savings and a situation arises, consider all options and the potential risk involved. Check out short-term leasing options, auctions, or bartering to name a few. Just as increasing risk is not good for your personal finances, it is also harmful for your business.

Decreasing risk by eliminating interest charges is essential for business prosperity. If you would like to know more about reducing risk in your business, or if you want to learn how a part-time, virtual CFO can help transform your business by using the Bible as our guide, email me at info@commonsensecfo.com or call Kirk at 402-658-7340.

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One Comment (+add yours?)

  1. Erma Rosano
    Mar 13, 2011 @ 14:55:03

    Just wanted to give you a shout from the valley of the sun, great information. Much appreciated.

    Reply

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