Most businesses, even the most successful ones, have debt. Debt can be used to successfully start a business, or move it from where it currently is to where it needs to go. The issue with debt is not having it, but properly managing it so that it works for you and not against you. The important thing is to have a plan. Without a plan, you may find your business sinking fast.
If you manage your debt properly, you can enjoy several benefits as listed in an article by USA Today. Your business can grow faster, you can continue running your business without having to take on new partners, you may be eligible for certain tax deductions, and you can increase your spending limit and also build your credit.
Reading the Signs
When a business becomes overextended, the signs will be evident. You need to interpret the signs properly and then seek the necessary help to get you from where you are now to the point of proper management of finances and debt. Here are some signs that you need to look out for:
- Insufficient cash flow – When you are struggling with cash flow, you are unable to source for the materials and supplies needed to serve your clients. If the vendors you use were to put you on COD terms or credit hold, service or product delivery would be difficult at best. If you find yourself extending delivery times, then this is usually an indicator that all is not well.
- Failing to meet payroll obligations – Businesses are run by people and if you cannot pay your people, then you are in a lot of trouble. Many times this plays out by people leaving the company en masse as they look for greener pastures.
- Dodging debt collectors – If you find yourself dodging debt collectors or having to come up with one excuse or another for why your payment will be late, it is time to rethink your debt management strategy.
- Falling behind on payments – Car payments, rent or mortgage and equipment lease payments need to be made regularly. However, if you are unable to make these crucial payments in a timely fashion, you can be sure that things are going south.
- Business and/ or personal accounts overextended – If your bank accounts seem to be in the red most times, you have a problem. Your business cannot continue like this for much longer.
- Securing a business advance with personal assets – This is an indicator that the business cannot stand on its own feet.
Figuring Out the Math
If you have checked off some or all of the above, it is time to take action. To begin with, you can do the math yourself or speak to a financial services company to help find out if you have over leveraged the company.
Calculate the following 3 ratios:
- Total debt / total assets = Debt to Asset Ratio
This figure should be under 40 percent and is an indicator of what you have borrowed compared to what you own.
- Annual debt payments / total income = Debt to Income Ratio
This figure also needs to fall under 40%. It shows how much of the income you make goes to the repayment of debt.
- (current assets less inventory)/ current liabilities = Acid test ratio
The figure should be greater than 1. This ratio lets you know just how easily you can get rid of the debts you currently owe.
Now that you have the numbers, you need to speak to professionals who can help you come up with a strategy that will allow you to pay off the debt at a slower pace so you can continue to grow. Creditors Relief will analyze your situation and provide a solution tailored to your specific needs. By resolving your debt issue, they allow you to focus on building the business and making sales so you can get back on your feet.
Getting Out of the Hole
With the issue of the debt handled, it is time to build the company so that you can offset the debt. Here are some tips to help you in the journey of financial recovery:
- Keep only critical staff – It is important to reduce the wage bill where possible.+ It may mean that you will have to do more work than before, but it really does help. If you are in a business with long sales cycles and do not have leverage against your competitors in pricing and costs, then letting go of non-critical staff is essential.
- Focus on marketing and sales – Since you need lots of new revenue sources to make sales so you can offset your debt, it is advisable to focus on sales and marketing. If you need to hire more people for this, do so, and do your best to structure their pay as mainly or partially commission-based.
- By speaking to a company that eases the debt burden, you are able to pay your debt off at a slower pace which allows for the recovery of cash flow. This goes a long way in improving debt control.
- Keep paying your taxes – This is one area that you don’t want to mess with, even during difficult times. If you end up falling behind, the IRS will assess interest and penalties and can even prosecute should they have cause to believe that you were committing tax fraud. It is best to speak with them and discuss a payment plan instead.
- Make loan repayment a priority – Now that you have a plan to work with, be sure to do just that. Implement your loan repayment strategy and prioritize it to ensure that you do not find yourself in the same position as before. If it means cutting back in the present so you can enjoy more financial freedom in the future, do so.
In the future, always consider how much debt is too much before plunging in. Remember never to borrow more than you can pay back and carry out these simple calculations to know how much debt is too much.
Author Bio: Karen is a Business Tech Analyst. She also consulted on business debt settlement. She is very responsible towards her job. She loves to share her knowledge and experience with her friends and colleagues.
Article by Karen Anthony