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Good Debt, Bad Debt

It is an admirable goal for small and midsized nonprofits to be completely free of debt, but this is not always possible or, in some cases, even advisable. Debt is different from having an accumulated deficit. For instance, having a mortgage or vehicle loan to own rather than rent those assets can build equity and predictability for cash flow needs. Good cash flow management may, on occasion, require an organization to access a cash flow loan or a line of credit. Pay attention to the balance between your organization's liabilities and net assets and strive to keep net assets positive, using debt only when it makes good management sense.

"Bad" debt, such as being very far behind on vendor payments or maxed-out on cash flow loans, is not fiscally healthy and should be targeted as a part of deficit reduction. When utilizing borrowing, planned or unplanned, be sure to understand the cash requirements related to the loan. Interest expense will be included in your expense budget and presumably covered by operating revenue. But payments to reduce the loan principal are not shown as expenses and could be overlooked. The cost of debt reduction, and identification of additional revenue to provide the cash required to pay down the liability, should be included as items in the budgeting process as part of budgeting for capital in the full organizational budget. 

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