I was dreading making the call.  I had spent about a month thinking and wondering what to say.

In all that time I came up with nothing, and I was out of time.

So I dialed.

After several rings a man answered.  He did not sound pleasant or in the mood to chat.  Which made me even more nervous.

I told him who I was and why I was calling.  I owed the New York State a large sum of money in past-due payroll taxes.

He didn’t say anything.

I told him I had just taken my company into bankruptcy, laid off 15 employees, lost almost $2 million and had absolutely nothing left to pay the State.

What I didn’t tell him was while I still owed almost $250,000 that I personally guaranteed from the now bankrupt business, I was most nervous about this debt.  Mainly because there were very few things that would follow me to the ends of the earth– whether I filed for personal bankruptcy or not– and that was past-due payroll taxes!

I knew would not get out of this one.

The man on the line looked at my account and told me I owed almost $30,000 and plus a rapidly growing amount in penalties.

In a hard and commanding voice he asked what I would do to take care of this debt.

And in that moment I finally had an idea.  I had nothing to lose, so I said, “Sir, I can do one of two things:  I can pay you monthly and it will probably take many years to make this debt go away.  Or I can speak with some friends and relatives about getting a loan for a part of this debt.  But whatever I could get, it would have to pay this debt off in full.  Because I could not afford to continue paying the State and the loan simultaneously.”

He told me to call him back with an amount and we would discuss it.

But after speaking with friends and relatives I was sure my offer to the State employee was going to be a deal breaker.  I got Mr. Hard Nose back on the phone and told him the amount:  $7,000.

The gruff man immediately told me I had a deal.  I almost dropped the phone!

The year was 1998.  And I just learned a very hard lesson on the difference between good and bad debt.

One of the keys to understanding good vs. bad debt is in understanding the difference between an asset and a liability.

“An asset is anything that puts money into your pocket and a liability as anything that takes away money from your pocket.” says renown American entrepreneur, writer and teacher, Robert Kiyosaki.

For example, Kiyosaki explains, buying a personal car is a liability, because it drains your cash instead of generating more of it.  He continues to explain that purchasing a home is also a liability, since it takes cash to pay mortgages, maintenance, etc.  It only becomes an asset when it is sold for cash.

Good Debt = borrowing cash to buy an asset.

Bad Debt = borrowing cash to pay a liability.

Sounds simple, but in business not only is it complex, it can be downright dangerous.

For example, you may borrow money on a line of credit to buy new computer equipment.  You make the argument that this new equipment will generate more cash for you now.

Will it really?  Or would will that equipment just be whistles and bells that won’t do anything your current equipment can do?

Unless you’re in the IT world, it is more than likely it is the latter, thus making it a liability.

Multiply this decision times ten other similar decisions and you now have a more serious problem with bad debt.

Another danger zone is borrowing for “working capital”.  Working capital is money used to cover monthly business expenses, like rent, payroll, consulting fees, etc.  In most cases, this is considered borrowing for a liability.

This is the reason few, if any lending institutions will lend to cover working capital.

How to Avoid or Fix Excessive (Bad) Debt:

• Know Your Numbers—The vast majority of the many entrepreneurs I have worked with that have debt challenges claim to “not be numbers people.”  If this is you, you MUST get this handled!
• Invest Wisely– Get clear on what are your business assets and liabilities.  Is taking on additional debt to purchase something really going to generate more business?
• Use Only What is Yours— Don’t use your payroll tax money, for example.  Instead, pretend you don’t have it. Find another way or don’t go that direction.
• Borrow Wisely— Only borrow what you know you can repay.  Be careful with, “Well, with the money I borrow, I will increase revenue and will make the payments.“ Do a risk-assessment evaluation and only do this as a last resort.
• Don’t Personally Guarantee— Banks will want you to.  Some landlords will insist.  My advice, resist this.  It defeats the purpose of incorporating your company, in most cases.  And you may end up spending years paying off your debts if you go belly up.

After those hard lessons learned from 1998, I now watch my finances like a hawk.  And while I have made bad business decisions since then, I recover much, much quicker.

Not a bad lesson learned from owing a $250,000!

Action Steps for the Week:

Take a look at your financial situation.  Check out your Current Ratio and Total Debt Ratio.

Current Ratio = Current (short term) Assets / Current Liabilities.  Anything over “1″ is good.  The higher the number, the better.

Total Debt Ratio = Total Debt/Total Assets.  Anything under “1″ is desired.  The lower the number, the better.

Once you have an answer you can reduce your bad debt, if necessary, by:

1)   committing to not take on any more bad debt,

2)   immediate focus on increasing revenue by X%, (determine the percent)

3)   decreasing expenses by Y%, and

4)   renegotiating your bad debt terms.

This takes imagination, discipline, and often times support.  Support of an experienced colleague, mentor or business coach.

These days I’ve been working with a lot of entrepreneurs here in New York.  What has always amazed me was many of them do multiple tasks while in the middle of a conversation with me, their teacher/coach.

At first I thought there was something wrong with me for not being good at multitasking myself and perhaps I was missing out on being more productive.

But then about a year ago I began to notice the busier and more multitasking the entrepreneur was, the more stressed and overwhelmed they also were.

And significantly less productive.

How significantly?

Multitasking can reduce productivity by approximately 40% according to some researchers.

Additionally, switching from one task to another makes it difficult to tune out distractions and can cause mental blocks that can slow down your progress.

But the real surprise came from Stanford University’s sociology professor Dr. Clifford Nass and his study of “heavy” multitaskers.

Interviewed on NPR, Dr. Nass discovered from studying students at Stanford the higher the multitasker, the worse they were at multitasking.

So all those young whippersnappers you see walking around with gadgets hanging all over them are, according to Dr. Nass’ research, the least productive.

Go figure!

Why are the “best” multitaskers actually the worst?

Dr. Nass thinks the answer might be in how the heavy multitaskers manage information:  do they explore vs. exploit it?

“Exploration refers to the desire to just gather more and more information, whereas exploitation involves the focused concentration in information,” Nass explains.

Regardless the reason, all studies by Dr. Nass and others show that multitasking impairs performance.

In fact it can even be harmful.

Harmful because multitasker’s cognitive processes are impaired, even when multitasking is relatively mild.

This means multitaskers are worse at most kinds of thinking, not just the type of thinking required to multitask.

Multitasker’s thinking is impaired by (according the Dr. Nass’ research):

1)   Reduced ability to filter information (useful vs. useless)— multitaskers are “suckers for distractions and suckers for the irrelevant….” says Dr. Nass.  In fact the more irrelevant the information, the more they are attracted to it.

2)   Reduced ability to manage memory— how well you organize it in your brain and pull it up when needed.  Multitaskers are much worse at managing their memory.

3)   Reduced ability to switch tasks— contrary to what would have seemed obvious, multitaskers are MUCH WORSE at switching from task to task!

While each of these three are amazing handicaps in their own right, the third one is down right scary.  Think texting while driving, conducting a train, or even flying an airplane.  All of which have made it in the news lately as sources of some fairly serious accidents.

As you know, entrepreneurs have a LOT to manage.  We are overwhelmed with things we have to get done, distractions we must manage and new business we must generate.

Just don’t do them while multitasking!

Action Steps for the Week:

If you find yourself not being able to manage the impulse of checking emails every few minutes, keeping your IM system on, Skype, Twitter, or other social media notification loaded, TV on while you’re trying to do your work, or any combination of these, then you may want to retrain your brain to focus.

First and foremost get this e-book:  FOCUS– A simplicity manifesto in the Age of Distration by Leo Babauta.

Commit to reading this book a few minutes each day and start to clear out the unsupportive habits you have around your daily routines.

Start with the basics:  clear off your desk and work environment, the piles of stuff cluttering your space, and then work towards de-cluttering your computer and desktop.

Then develop routines for when and how long to do certain tasks like checking emails, doing social media work, returning calls, etc.  And then shut it off.

Have problems with this?  There are software apps to help you manage this.

Once you start putting these practices into place, you will find you are so much more productive than you were when you thought you could not miss that email or IM coming in.

Do it and you’ll see.