Originally posted by @Kerry Boyle:
Originally posted by @Frankie Woods:
Agree with others: over-leveraged can be seen as not having enough cash reserves to cover months (or years) where you don't have income to cover expenses (e.g. PITI payments, MX, unexpectedly large CAPEX, etc.). It all comes down to your risk level. In good times, people start taking on more and more risk. In bad times, those who risk the most generally lose. General rule-of-thumb: keep enough reserves to cover 3-6 months of expenses. During times like now, you may need more; however, the government looks like it might step in this time. Not sure it'll help the little guys though...
I was thinking about this some more, and I think it makes sense to say that you are over-leveraged the minute that you don't have the cash reserves to cover this exact moment of debt-obligations.
So if you hold 6 months reserves, make no money in 6 months and in month 7 can't pay the bills - you are over-leveraged.
If you had a short-term loan that builds in all the payments, you couldn't be over-leveraged until you have to pay it off.
The only problem with this is that no one will ever truly know how long a black swan event will last. I think the consensus is to not be in a situation where you don't have cash reserves, credit, and personal relationships to cover hardships when they appear. Run your business using the principles ascribed on BP and, if ish hits the fan, have alternate means to weather the storm. Definitely don't be the guy running his business "paycheck to paycheck".
Heck, there are expert reports that imply a large % of business only have a ~30 day buffer between cash on hand and bills needed to run it. Scary thought given the current environment.
I have cash reserves to weather about 3 months. Then I have relatives that know what I do who would provide capital. And finally, I have retirement accounts to weather another year or so. This is the mentality professionals should be thinking about.
