This brings us to the Income Statement. When times are tight we go into survival mode, cutting expenses where we can, laying off people and cutting rates and markups to try to keep our share of the business. It is during good times that the seeds of destruction are planted. In order to increase sales we grow the company, adding equipment and other assets. We finance these increased assets by drawing on the bank line.
Total debt starts to rise in relationship to equity.
Remember, the balance sheet always balances. As the business brings in more gross profit dollars, we are tempted to spend more and perhaps to draw a bigger salary. One culprit may be the company accountant who tells us that we now have a tax problem and should spend some money. At any rate, profits which could have gone to the bottom line don't, and the debt - equity ratio gets lopsided. When assets increase faster than owner's equity, the company is headed into trouble.