How to Get Out of Business Debt While Staying Profitable

Business debt isn't a spending problem. It's a habit problem.

Publication Date November 15, 2025

WHAT'S IN THIS ARTICLE
Introduction | 1. Mindset Shift | 2. Build Your System | 3. Celebrate Wins | 4. Calculate Your Baseline | 5. Freeze & Audit | 6. Eliminate Debt | Wrap-up | Key Takeaways

PREVIOUS ARTICLE IN SERIES >> Make Your Profit Deliberate and Intentional

I'm writing this from Canada, but the principles work anywhere.

In February 2023, Statistics Canada released a report that was shocking. One in four Canadians were unable to cover an unexpected expense of $500. (source: Statistics Canada, February 2023) An October 2024 Leger poll reported that 47% of Canadians report living paycheck to paycheck. It rose to 54% among Canadians aged 18 to 34 and to 57% among those aged 35 to 54. (source: Leger, October 2024)

This means that if you have $100 in your pocket or your bank account ... and zero debt, you are in better financial shape than 25% of Canadians who couldn't cover a $500 emergency without borrowing.

I can remember back in the mid-eighties when I lost my job. Alberta was experiencing an economic downturn. I found a new job a few months later but for less pay. I couldn't sell my home because in a down market, the sales price wouldn't cover my existing mortgage. I bought when the market and interest rates were high. Selling then renting wasn't a realistic option anyway because rents at that time were more than my current mortgage payment. I had a car loan to think about too. That's the moment I reframed my definition of financial independence.

Fast forward to the late nineties. I bought a business to find out the previous owner had 'cooked' the books and the revenue stream to cover expenses did not exist. While I didn't follow this exact method, I instinctively did most of what the method described here so brilliantly showcases.

I've just finished watching another free Universal Accounting webinar with Roger Knecht and Erin Moger about achieving financial freedom by systematically eradicating your debt. In the webinar Erin made a point that stuck with me. "Well dressed poverty is still poverty." It's what I refer to as conspicuous consumption. If I heard correctly, she defined [entrepreneurial] poverty as not having the means to support what we want like a nice new car or a lavish vacation while struggling to feed your family at home.

So let's take a breath, and walk through this together. Here are my note's on how you can systematically pay off your debt while having a profitable business that supports your family's needs.

In this article, I'll review the 6-step behavioral system to eliminate business debt while staying profitable. The presentation is based on the Profit First* profit method. I've added the link to the free video (and others) at the end of this chat so you can watch it in its entirety.

Erin mentioned the two things you need to understand about achieving financial freedom. It's tied to how money functions. (1) If you want to be debt free you need your business to be profitable, and (2) you need to pay yourself. Erin reminds you that you are the most important person in your business. You need the business to provide for you and your family's needs otherwise what's the point.

In my most recent article on bookkeeping-essentials.ca, I write about the emotional side of money and how it affects the way you run your business. Roger mentioned when he is working with business owners, he can see they bring their personal beliefs about money into the business.

So how do you bring that emotional change you need to change your physical money habits?

Erin Moger is a Profit First Guide. She explains that Profit First is a cash management system based on behaviour. When you implement the system, it changes habits and how you think about money. She gently states that you need to start by paying yourself first on a schedule.

The example she used was weeding. She explained she hates weeding ... so much that 90% of her yard is weeds. The only way to get rid of the weeds is by pulling them out at the roots. Her point was, you can't solve money issues by covering it up with quick fixes today. You need to address the problem at its root to eradicate the problem permanently.

You are going to have to inoculate yourself a bit about the upcoming discomfort as you move through the process. Initially, it is going to feel dramatic and a little bit uncomfortable to talk about these issues head-on.

But, it's important to look at the end result and what would happen if you don't follow this path to paying off of your debt. Just making that decision to pay off all your debt changes how you even think about the small decisions you make daily.

This Week's Money Habits

• Give yourself a week
• Find an accountability partner (someone you have to justify your purchase(s) with)
• Stop recurring purchases (for now ... I know with all the talk of automating your workflow, this may be a bit painful ... remember we talked about being ready for some discomfort)

Acknowledge when you are doing a good job. Celebrate when you decide not to spend money by going for a walk, call a friend, do a victory dance, journal about it - celebrate in any healthy action or activity that does not require spending money. 

Temptation is all around us. Every time you choose to say NO, celebrate it in some way. Let's acknowledge that discipline is important but we are all human. Practice delaying purchases. Set some kind of arbitrary rule for yourself like if you need something from Home Depot, if you can drive by the store and not stop in to make your purchase four times, ask yourself, "Do I really need it?'

You can even leverage this in your personal life. Erin and her husband decided to implement a two day delay when needing groceries. During that two days of going without the food items they wanted, they utilized the food in their pantry and freezer instead of calling for takeout. As they practiced this habit, they were able to move their two day spending guardrail to four days.

I've been watching Homestead Rescue. The Raneys are very big on looking around for what resources are available to you on your property without spending cash. It's amazing how ingenious some of their solutions are.

One tip Erin had was to find an accountability partner. The idea is to check in with your 'partner' every time you spend money over a predetermined amount and justify why you need to make the purchase and how it will help you meet your profit objectives.

Money Rules

Personally, I setup 'money rules' I follow so I stay on track to meet my financial objectives. It comes in really handy when you are in a 'weak' moment. As you go through the steps laid out in this article, create your own custom 'money rules' you want to live by for this process. It helps you fight temptation in moments of weakness.

So the takeaway here ... anytime you have a little victory, rejoice. It's a good moment! Have no idea where to start? Start with your recurring purchases for low hanging fruit.

Okay, so we've talked about changing your mindset and celebrating small wins. Now let's get practical. We're going to figure out your baseline - what you actually need to keep the lights on. This is called your monthly 'nut,' and once you know it, everything else gets easier.

Your next step is to stop and think about how you budget for your business. Do you create your budget based on the best months, worst months, twelve month average, or a rolling average? Erin suggested budget for worst case scenario. It helps set you up for wins. If you do better, it's a fist pump moment. Woohoo!

Before you move into step five, you need to know your baseline - what is called your monthly 'nut'.

Now that you know your monthly nut, you're ready to implement a spending freeze and evaluate every expense against that baseline. Did your heart just stop for a second? I think I did mention there would be some discomfort with this process. But this is temporary and how you will that get that clarity we talked about. Stay with me.

While you go through the process of setting up your debt repayment plan, implement a spending freeze. You see large public corporations use this tool all the time when they freeze hiring or prior to restructuring.

Are You Ready For The Discovery Phase?

During this temporary spending freeze, you are going to go down into the trenches and classify every expense. Here's how to set that in motion.

First, print (yes print!) all statements that show where you spent money such as:

• bank statements
• credit card statements
• loan statements
• accounts payable
• any leases.
  
  If you haven't been keeping your business and personal spending separate, you may also need to review your personal statements for business spending.

Next, classify every expense line using the 'PRU' categorization system:

• Profitable
• Replaceable
• Unnecessary 

Don't panic. This isn't as scary as it sounds. Let me show you what I mean.

• Perhaps your accounting software saves you hours every month = Profitable.
• The expensive premium shipping you are using when standard shipping would work fine = Replaceable.
• That subscription you forgot you had but needed once upon a time, it can go now = Unnecessary.

See? You already know how to do this. You just haven't given yourself permission to be honest about it.

I know this feels overwhelming. You're looking at months of statements and thinking, 'How did I let it get this bad?' But here's the thing ... you're doing this NOW. That's what matters. You are starting. That's HUGE. And you don't have to do it all in one sitting. Start start with just one month. Get the feel for it. Then do another ... keep going until you've done 12 months. You didn't get into debt overnight. It'll take some time to get out of debt ... but you have to do the work. There are no short cuts. Take a deep breath and let's keep going.

It's possible that as you go through line by line, you will find expenses you have no idea what it is or what it was for. When that happens you need to go into detective mode. I'd check if a receipt was entered lumped together instead of coding all the items on the receipt separately. It's also possible it is a coding error or that purchases were made that you aren't aware of.

There is power in asking questions even if you don't have a lot of 'unnecessary' tagged expenses. You are a smart business owner. Capitalize on that. On a go-forward basis, the questions will likely happen naturally as you spend money ... if you stay laser focused. Erin says you may find it becomes addictive. The habit will have many positives ... not just negatives. Working 'on' (not in) your business can be empowering, especially when it helps you make intelligent business decisions.

Now That You Know Where Your Money Goes, Let's Calculate Your Core Nut

At the end of step four I introduced how to calculate your 'nut'. So here is what you do with this calculation (the process):

1. Calculate your nut. (Total annual expenses ÷ 12 = monthly nut)
2. Compare your 'nut' to your operating target/assessment.
3. Eliminate the difference with a 10% buffer.
4. This creates discomfort but is necessary. It requires a lot of action.
5. You can't pay down debt while continuing to generate it.

For example: Sarah's bakery spent $8,400/month. After the PRU audit, her core nut was $6,200. With a 10% buffer, her target became $6,820. Now she knows exactly what she needs to operate. She can now build her Profit First allocations around that reality.

MORE >> What if I can't cover my core nut even after cutting everything unnecessary?

So let's summarize:

The three requirements you are aiming for are to be profitable, to pay yourself, and get rid of unnecessary expenditures. Your goal is to function within your means and stop incurring new debt.

Now, some people will tell you to pay off the highest interest debt first. It's known as the avalanche method. Mathematically, they're right. But we're not dealing with math here. We're dealing with human beings who need to FEEL progress. That first debt you eliminate? That's oxygen. That's hope. Don't underestimate how much you need that.

Let me introduce you to the snowball method. It's a systematic method to eliminate debt. This strategy build momentum psychologically with quick wins. This builds confidence and momentum. I think it's genius because you will get to experience the emotional relief that comes from eliminating debt obligations. This psychological benefit often outweighs the mathematical optimization of the avalanche method which pays the highest interest rate debt first.

Here's an overview of how the snowball strategy works:

• List all your debts from smallest to largest (regardless of interest rate).
• Make the minimum payments on all debts except the smallest debt.
• Attack the smallest debt aggressively until it's eliminated.
• Roll that payment into the next smallest debt.

What if you have multiple debts at the same balance?
I'd start with the debt with the highest interest rate first. If they are all at the same interest, I'd do 'pin the tail on the donkey' ... or the one that bothers you emotionally the most.

What about my line of credit that I use for cash flow?
Your line of credit (LOC) is an important business tool. It is a flexible, short-term financial safety net. Its purpose is to cover the cash gap between accounts receivable and account payable. It's ideal and necessary to manage your operating expenses. Continue to use it for its intended purpose. If you strayed from that purpose, make an intentional regular repayment schedule and include it in your TAP planning - the spending plan from the Profit First system. 

Now you might be thinking, 'Great, I've cut my expenses. Where's the part where I pay off my business loans and credit lines?' Here's the thing - those minimum payments are already in your core nut. They're handled. What's NOT handled is the debt that's keeping you up at night and draining your ability to focus on growing this business. For most solopreneurs, that's personal debt that bled into business spending or personal obligations that make it impossible to take a real paycheck. That's what we're tackling next.

Erin introduced the Profit First tweak to the snowball method. It's good. Rather than putting ALL your money toward debt, Erin explains you will continue allocating to your 'Profit' account (even if it's just 1%). You will also maintain your other essential allocations.

Now here's the 'tweak'. Create a specific percentage allocation for debt reduction. This will ensure you don't sacrifice profitability while working to become debt free. Remember one of your goals is to have a profitable business.

Here's how this works in practice

Here's what most articles won't tell you. If you're a solopreneur or small business owner, your personal and business finances are connected whether you like it or not. Personal debt stress kills business focus. Business debt drains household cash flow. Erin's method addresses both systematically.

So how do you implement Erin's tweak? You are going to use your 'Profit' account to pay yourself your 50% bonus as usual. This mean, yes, you are taking the money out of the business. You will keep 1% of that distribution for yourself because you deserve to celebrate. The remaining 99% of the distribution will be used to pay down your [personal] debt from smallest to largest. As mentioned, you will pay the minimum balance on all other debt balances and putting your maximum payment on your smallest debt. Once you have cleared all your short to medium term debt, you will move on to tackle your long term debt (i.e. your mortgage). Once that's done, you will take your quarterly distribution in full and apply it to your retirement savings.

I'm going to admit I was a bit confused here because what Erin describes sounds like paying down personal debt, not business debt. I'm making two assumptions (I know that's dangerous!): First, that business debt payments are already included in your core nut expenses so they are 'taken care of'. Second, that Erin's method prevents the owner from being personally broke whilst the business looks profitable on paper.

Here's the reality for many small business owners ... even with proper separation between business and personal finances, personal financial stress affects your ability to run your business effectively. If personal debt is draining your household budget, it's harder to focus, make good decisions, and invest energy in your business. Erin's approach acknowledges that your personal financial health and your business financial health are connected - eliminating personal debt frees up mental space and household cash flow, which indirectly strengthens your business.

If you've been using personal credit cards or loans for business expenses, or if personal debt is draining your household budget and affecting your ability to focus on your business, her approach addresses that reality. It allows you to put the 'blinders' on and systematically eliminate the debt that's actually holding you back.

My personal approach? I'd tackle personal debt first since the interest isn't tax deductible, making it more expensive in real terms. Business debt interest is tax deductible, so it costs less after tax. But the key principle remains ... eliminate the debt that's creating the most financial and mental burden first, then systematically work through the rest.

How Long Does This Take?
That depends on your debt load and profit margins. Sarah's bakery (from our example) had $18,000 in debt and allocated 15% of revenue to debt reduction. At $8,000/month revenue, that's $1,200/month toward debt - roughly 15 months to debt-free. Your timeline will differ, but the system works regardless of the numbers.

From my point of view, what does it matter? You just need to start addressing the debt problem no matter how long it takes to become debt free. It could be years depending on the type of debt you have. Who cares. Just work systemically to eradicate it. It takes as long as it takes. Just start.

• Don't forget the importance of having an an accountability partner to advise you in your moments of weakness.
• Being proactive is a way to improve your situation. You will see the results on your balance sheet and in your ratios.
• One small step in direction is still a step in the right direction. Little things do lead to big things. Start small and stay focused.

I want to leave you with something that's been on my mind lately. I've been watching Homestead Rescue recently. If you aren't familiar with the series, the Raneys from Alaska travel around and rescue homesteads in trouble. It is a living testament to how if you stop and look around, the property will provide the solution. Misty Raney said something in a 2017 interview that I think also applies to your situation.

"The most difficult part is keeping your head straight and really staying grounded. It's a lot to do with who you are as a person - staying strong. The [homesteader] lifestyle isn't easy or convenient. You're always going to be struggling, but that's part of it.

One of the biggest mistakes people make is not focusing. They're all over the place and forget the basics - food, shelter, water. When you lose sight of those necessities, you lose focus." [1]

That's what your goal to pay off your debt is all about. Staying focused on the basics - being profitable, paying yourself, eliminating unnecessary spending. When you lose sight of those, you lose focus. But you're here. You're reading this. You haven't lost focus. You're just finding your way back.

Apply Erin and Misty's advice to running your business. When it comes down to it, debt elimination must be systematic, psychologically sustainable, and integrated into a healthy cash management system ... not treated as an isolated problem to solve through deprivation alone.

The Profit First approach emphasizes that debt itself isn't the core issue. It's a symptom of spending more than you earn. The real problem is the underlying cash flow management habits that led to the debt in the first place.

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For Canadian business owners, 2025 has added another layer of complexity ... tariffs and trade uncertainty. If cross-border costs are affecting your margins, I've put together a series on tariff impacts and cash management strategies that complements what we've covered here.

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You can watch the Universal Accounting webinar for free on You Tube >> Debt Reduction - A Profit First Approach. The entire series really is enjoyable to watch. Think about spending one lunch hour a week to learn ... kind of a 'lunch 'n learn':

1. How to Establish a Profitable Business From Day One 
2. How Healthy is Your Business?
3. Establishing Rhythm and Evaluating Expenses

I've said it before but I think it bears repeating. Erin Moger has a natural way of speaking and teaching that leaves you wanting ... more.

[1] July 13, 2017 Homestead Rescue video on Facebook.

* Profit First is a registered trademark in the U.S. and other countries.

Disclaimer: I am not a certified Profit First Professional or associated with Mike Michalowich. I just like the system and introduced some of my client's to it. Get Mike's book to learn more about the system.