Without proper management, the burden of debt can put your small business at risk. Although many small business owners rely on credit to some extent to help grow their companies, if you continue to add to that debt to manage your day-to-day operations, this is a clear sign you’re headed to insolvency. Here we share our pro tips on effective debt management for business owners to help you get back on the road to profitability.
Always Know How Much You Owe
Effective debt management begins by always knowing how much you owe. It’s easy to let debt get out of hand if you aren’t following the basic principles of bookkeeping by paying close attention to cash flow.
How and why cash flows in and out of your business allows you to track spending, as well as how much of that spending is contributing to debt. Basic bookkeeping also tells you how much of your cash flow is going toward paying down debt, what type of debt you have, and what creditors are owed money.
A good rule of thumb is to review your obligations, listing the creditor, amount owed, interest rate, and minimum monthly payments. Then compare that to how much you are paying towards that debt and from where. For example, if you owe $5,000 on a credit card and you are only paying the minimum amount each month, your debt burden is slowly increasing due to interest accumulating. To make matters worse, if you are paying that minimum amount using a line of credit, you’re building debt although it feels like you’re paying it off.
Once you have everything listed, look at your incoming cash flow and where that money is going. Hopefully, you have enough cash flow to start focusing on paying above the minimum amounts and can avoid using credit until you start clearing off those balances.
How To Manage Business Debt Through Consolidation
If you have a large amount of credit available on a low-interest line of credit, you can use that line of credit to pay off all your debt. Although we said paying debt with credit is not a good idea, consolidation is different. The goal here is to create one monthly payment on a single debt at the lowest available interest rate.
This allows you to focus on the principle owed and reduce the interest you pay over the life of the debt. If you don’t have existing credit available, you can apply for a line of credit or a debt consolidation loan. And remember, putting excess funds towards debt repayment helps pay things off even faster.
Reduce Expenditures To Help Manage Business Debt
Basic bookkeeping practices put your financial realities into perspective. Seeing your debt as a single figure is the wake up call you need to understand debt and your expenditures. You can then cut unnecessary costs to help avoid debt while also having more cash to help pay it down faster. This might include finding ways to reduce costs for utilities, swapping out that expensive hot beverage pod machine for a basic coffee maker and kettle, and sacrificing other nice-to-haves until your debt is under control.
Adapt A Smart Debt Payoff Strategy
If consolidation isn’t an option, you can gain control of debt by adopting a smart debt payoff strategy. This is Accounting 101. Often referred to as the “snowball method,” there are two possible approaches:
1. Starting with the lowest balance: Pay your lowest debt first, while continuing to pay the minimum amounts for your other debts. Tackle progressively higher debts as each balance is paid and add the money you would have used on each paid balance to the minimum payments you’ve been paying on the remaining debts. This builds an increasingly larger “snowball” of funds to pay your debt off faster.
2. Starting with the highest interest rates: This option focuses on reducing the money wasted on interest, starting with the highest interest balance and working your way down.
Once your debt is paid off, you’ll have excess funds each month to put back into your business.
How To Avoid Bankruptcy From Debt
When you owe large amounts of money, the worries of bankruptcy are a constant threat to your business. However, you can avoid bankruptcy using the following strategies:
Renegotiate vendor contracts
We advise doing this sooner than later, as you want to renegotiate vendor contracts and supplier terms while you’re still in good standing. By doing so you can maintain access to the supplies you need and reduce the costs of late penalties and interest.
Focus on your core products and services
One of the most effective ways to increase your revenue is to focus on your top-selling, lowest-margin products and services and reduce effort on less popular, lower revenue-generating items.
Kick up your accounts receivable efforts
Unmanageable debt is often related to poor accounts receivable management. Tracking money owed to you and having a more aggressive policy to collect that debt is a simple way to improve cash flow so you a) can pay off debt and b) avoid needing credit. It doesn’t have to be a negative process. You can do things like asking for deposits from new customers, offering discounts for early payments to your best customers, or providing more payment options such as credit cards, electronic transfers, pre-authorized debit, etc.
Find new revenue sources
Although you might not have the capital to diversify your income, you might have ways of boosting revenue such as selling equipment you don’t need, renting out a spare office on your premises, moving to a smaller space by allowing trusted employees to work from home, or taking on a side hustle until your debt is paid off.
Look into government funding
Keeping on top of Canadian grants, loans and subsidies for small businesses might provide funding you didn’t know was available.
Work with an accountant or bookkeeper
You can improve your financial management by working with an accountant or bookkeeper. They will help keep on top of things and implement the above strategies. They’ll guide your financial decisions so you aren’t faced with debt, and you can focus on growth instead.
Call Intrepidium today to learn more about our accounting, bookkeeping and Fractional CFO services today at 778-800-7976 or click here to schedule a consultation.
