QUESTION: Brad in Knoxville is a small business owner with $300,000 in gross sales. He nets $50,000 a year and has $110,000 in total debt. He makes a lot of purchases with vendors using net 30 terms. How do those fit into the Baby Steps?

ANSWER: They don’t. You should have the cash flow to cover them, or you shouldn’t be doing purchases. That’s just like having an electric bill; you need to pay the electricity. If you order stuff from a printer, you don’t prepay it. You pay it when it comes in. They drop the stuff off and leave you an invoice, and you pay it within 30 days.

We generally clear those in eight to 10 days if everything was all right on the purchase order and the quality was there because the order met our specs and everything. If we don’t have the money, we don’t order the stuff. We’re not hoping we can sell it after they get it here to pay them. That is planning debt and riding on the back of your vendors. We have the money here so that as soon as it clears accounting and goes through the purchase order system and everything, then we cut checks the following Tuesday.

You are doing a good job of planning your cash flow. As long as you plan the cash flow like that, it’s fine. We’ve bought stuff where we didn’t have the cash there right that second, but we had a pipeline full of receivables that were steady and predictable in coming in, so we didn’t get ourselves in trouble. You just don’t want to get in a cash flow bind that ends up getting you in debt. But it is normal course of business to clear stuff in 30 days.

QUESTION: Matt in Colorado is 58 and self-employed. His son works with him. In a couple of years, Matt plans to retire and would like his son to take over the business. The business has a $45,000 yearly net profit and his Matt’s son makes up to $55,000 a year. For the transfer, Matt’s son would buy the tools and equipment that he wanted and sell whatever he didn’t want. What’s the best way to transfer it?

ANSWER: If he wanted to give you $50,000 for the tools and he owned the business, he could probably do that in about a year because he’d have the extra income in addition to his salary. He would make $80,000 to $100,000 a year if he owned it by himself, between his income and the profit. If he gave you $50,000 out of the first year and had a slim year, that wouldn’t be a bad deal for him.

Clearly define his role in using your shop. If you say that he can use it until he needs to move, you might look up 10 years later and he’s still there. As far as you’re concerned, he’s five years overdue on having to move, but has far as he’s concerned, he’s just using the shop. You need to say that, in three years, he needs to plan to move. If it doesn’t work perfectly, you can talk about it, but that needs to be the time frame.

Start thinking that way, and that means he has a year to buy you out and two years to find a place to rent. If there’s a major problem in the economy or something, you can put it off for a year if you need to, but go with the three-year schedule and write that down.

You guys are both married, so it’s very important for the four of you to all be in agreement on this. When family works together, there has to be very clear communication. That way, his wife doesn’t feel like her father-in-law ripped them off or something. If she’s in on the decision and your wife is in on it, and you are all in agreement and they’ve gone over the agreement with you and everyone is all right with it, then put your stamp on it and move forward.

It sounds like a pretty easy thing. The other thing is handing off succession. It needs to be very clear and stated. Go ahead and start talking to your team about that as well. Tell them you’re on a two-year schedule and that your son is going to be learning certain things during that time and you are going to make sure he is a leader who can run this place.

That actually gives your employees a lot of confidence that everything is going to be all right. I am probably about 15 years away, not from retiring, but from not running this place as the CEO. I’ve already begun the succession process of building leaders and working with the new owners, who are my kids.

The leadership team here knows that and knows the details, so they are helping all of us achieve that 15-year goal. But that gives them the sense that we are heading the right way. They don’t feel like they have to leave because the old man is getting old and the place will close down when he dies. Instead there is a plan, and that gives them great peace.

It has been very good for attitude and moral around here that we’ve begun to talk and look generationally about how we’re running the place. You’re being very wise about how you are doing this.

QUESTION: Daniel in Detroit is in the middle of his debt snowball. He’s trying to settle with one of the collectors and owes them $9,000 and wants to offer $3,000 that he has now. The collector is asking for a lot of information he doesn’t feel comfortable providing. He has the money to settle. Dave has a plan that he thinks should work for Daniel.

ANSWER: A lot of times, what they’re doing is just gathering up information so they can sue you. I’m not interested in providing them with all that information. I would just offer them the $3,000 and tell them that your financial coach told you to not provide a bunch of information to them.

You offer them $3,000 and if they want to settle this debt, you can settle it today. If they don’t, they can call you back when they want to talk. But you don’t need to fill out a bunch of stuff that enables them to more thoroughly sue you. If they want to take $3,000, that’s the offer on the table. But you don’t provide them with bank account information and lawyer information and a bunch of contact pieces.

QUESTION: Katrina in Texas asks if there’s a downside to refinancing a home often. Dave says it can be good if you save enough in interest over a year.

ANSWER: Not as long as each time you do, you lower your interest rate enough to where you can recoup your closing costs before you move. Every time you do the transaction, it has to work out. The way you do a refinance—and most people do need to be refinancing right now—is you calculate how much interest you will save in a year as a result of refinancing. The way you do that is multiply the interest difference times your loan balance. If you have a $200,000 mortgage and you have a 5% loan and you go to a 3% loan, which saves you 2% a year, two percent on $200,000 is $4,000. How much are the refinance costs? What are the closing costs in order to refinance? If you look at that and it’s $10,000, you divide that by $4,000. That would tell you it takes you two and a half years to get your money back. If it’s $8,000, it’d take you two years to get your money back if you’re saving $4,000 a year. That’s pretty substantial.

Truthfully, your closing costs would be lower than either one of those, so in that example, if your closing costs were $5,000, you’d get your money back in a little over a year. Even if you refinanced two months ago at 5%, if you were to drop it to 3%, you’re going to get your money back really quickly. That’s called a break-even analysis. How long does it take you to get the money you spend on closing costs back with the interest that you save? That gives you the answer of whether you should refinance again. There’s not really a “you’ve done this too often” rule. If you refinance three times in one year, it would have to be that the interest rate environment is that rates have dropped pretty substantially through that year. You really can’t do this and save an eighth of a percent. It doesn’t work out for you.