Why Dave Ramsey is Bad for Business – Part 1

I  am going out on a limb here, but I don’t like Dave Ramsey. That may be  heresy to some, but let me explain why. Aside from the fact that he is  dull to listen to, has not a funny bone in his body, and generally is  preachy and dogmatic, that is not why I think Ramsey is bad for  business. It’s not even that I disagree with his advice, although most  of it tends to be more family therapy than financial help. In large  part, his recommendations make a lot of sense for the right people, and  that is what brings me to my trouble with him. His advice is geared  towards wage earners, NOT small business owners. I’m sure there is a lot  of crossover, meaning many small business owners have wage-earning  spouses, and deal with many of the same issues. The shortcoming is,  however, that Ramsey’s advice doesn’t go far enough. His advice is, “if  you don’t have cash, don’t buy it.” Brilliant idea, but not very  practical for most small business owners. Sure it is preferable to not  have to borrow money, but does it really make good business sense?

Generally,  I would say no, and except for a minuscule number of businesses in the  world, is not done. So why is it okay to borrow money in a business and  not personally? Well, let’s first look at what debt really is. Debt,  along with any other source of capital (i.e. leases, silent partners,  receivable factoring) is leverage. It is taking on a financial partner  in which both parties have something to gain. This is not some predatory  credit card company taking advantage of ill-informed consumers. It is  an informed small business owner (if that doesn’t describe you, then  skip to the last section of the article!) that needs cash, partnering  with another individual or company that has cash, and would like to earn  money on it. Nothing sinister or immoral about it, and really it is no  more complicated than that. And I’ll go a step further to say that in  principal, there is NO difference between a factoring company, a bank,  and a silent financial partner. There are practical differences, but the  essence of the transaction is all the same.

The Big Stick

‍With  leverage, you are able to lift more. In principle it is no different  than using a lever to lift a heavy object. Longer lever, easier to lift  the boulder. And like in reality, leverage comes with additional risk;  you have less control over the load. Things go backward just as easily  as they did forwards. If there is a sin that small business owners do  commit it is that they don’t understand their risk, and manage it. They  approach debt like they do personally, which brings me back to Dave  Ramsey. Ramsey does next to nothing in educating his followers in  financial affairs. What you say? How is that so? He’s on the radio,  writes columns and books, all about finance. In reality, most of Ramsey’s financial advice is no more complicated than, “Don’t spend more than you take in.” Did I really need someone to tell me that?

A Better Way

‍Rather  than listen to Dave Ramsey, small business owners should spend more  time finding people that have been there, and done that, if possible in  their industry. They need to seek out financial experts, like CPA’s,  that can give them expert advice. They need to read Rich Dad, Poor Dad  by Robert Kiyosaki, rather than more of Dave Ramsey. The truth of the  matter is that the reason Ramsey has to deal with people on such a basic  level is that our economic education in general, is so poor. As Malcolm  Forbes quoted so often from the Bible, “With all thy getting, get  understanding.” Small business owners need to immerse themselves in  learning about financial matters. I’m not suggesting that they study the  income tax code, or go back to college for an accounting class. What I  am suggesting is that they need to quit saying, “I don’t really need to  understand that stuff. Someone else handles that for me.” Every time one does that, they aren’t managing their risk; they have no idea what  their risk is!

The Answer

‍The answer to the unasked question is, there is nothing wrong with borrowing money! As long as:

You are using the money to purchase an asset,
You know the risk,
You are comfortable that the return is worth that risk, and
You manage that risk to achieve that return.
Don’t let Ramsey scare you into not borrowing money. It’s bad business.

Next  time I’ll discuss partners, as in Dave Ramsey doesn’t think you should  have any. That is even worse advice than not borrowing money!

Feedback

‍Tell me what you think. Do you agree with me or Ramsey?

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