WorldWide Drilling Resource

33 AUGUST 2015 Drilling Into Money Not Boring by Mark E. Battersby Debt as a Business Tool One of the most daunting four-letter words for any drilling business owner - particularly those with smaller operations - is the word “DEBT.” Not too surprisingly, the tightening of credit, fewer sources for capital, and the general skittishness on the part of lenders, has made avoiding debt easier for many small business owners. But, is operating and growing a debt-free business really practical? While it is true, borrowing enables a business to take actions or grow at a pace which might other- wise not be sustainable, it can also result in a less flexible drilling business and one that takes on greater risk. After all, the more the business borrows, the more it must spend for debt payments and interest. How healthy is your drilling business? Calculating the drilling operation’s financial ratios allows the owner or manager to check their business’s current temperature, diagnose potential problems, and see if the business is doing better or worse over time. The term “Total Debt Ratio” says it all; the total debt ratio shows how much the business is in debt, making it an excellent way to check the operation’s long-term solvency. The formula is: Total Debt ÷ Total Assets = Total Debt Ratio. These numbers can be taken from the operation’s balance sheet and simply plugged in. To illustrate, a business with $22,375 in total assets and $25,000 in total debt would have a total debt ratio of $25,000 ÷ $22,375 = 1.11:1. Thus, this business has $1.11 in debt for every dollar of assets. Obviously, the total debt ratio reveals this business is not in good health and may become really ill. The lower the debt ratio, the less total debt the business has in comparison to its asset base. On the other hand, businesses with high total debt ratios are in danger of becoming insolvent and/or going bankrupt. In the early stages of a business, debt financing can be dangerous. In all likelihood, the new operation will be losing money at first, thus hurting its ability to make payments. Also, since its net income will be low, the tax advantages of debt will be minimal. As the business grows and matures, debt becomes a stronger option. The tax advantage will be greater, cash flow will be more predictable, and the risk faced in bankruptcy decreases since the business has been operating longer. So, is operating and growing your drilling operation or business debt-free really practical? Mark Mark E. Battersby may be contacted via e-mail at michele@ worldwidedrillingresource.com +3$ (1 -.2 )312 /0("$ !32 2'$ .4$0 ++ 1$04("$ -# $6/$0($-"$ .%%$0$# !7 '0../ ."* (2 .,/ -7 - $&(12$0$# 0& -(8 2(.- .6 9 .-* 5 6 , (+ 1 +$1 2'0../0."*!(2 "., 555 2'0../0."*!(2 "., Yes, thank you & you too...along with the whole WWDR crew. [In response to Kathy’s e-mail to ‘have a wonderful July 4th!’] Steve Wipf Northwest Flattanks Choteau, MT WorldWide Drilling Resource ®