From my own experience, every business should never have any debt. So if you decide to borrow or already have debt, then you should know how to keep a business afloat and manage debt.
In practice, it is very hard to have a business without any form of debt. Money is borrowed for reasons like capital investment, business expansion, to manage cash flow and for many more such things. I believe, the next challenge than being an entrepreneur is to be an entrepreneur with debt. Even personal loans on credit card, education loan, etc… are a challenge for an entrepreneur. Remember that having debt is not the end of the road, however bad it is you can still manage it out.
Calculate your Total Debt
To be financially fit, you need to know what is your debt and the interest at which you have to pay it back. In order to successfully manage debt, one has to know the extent of money borrowed. The time of repayment must also be considered for the calculation of the interest rate. Analyze and calculate the total the debt that you have to pay back with the interest.
Repay Loans First and on Time
First Priority when there is debt is to repay it. It always makes sense to repay the loans first because by eliminating the interest rate and debt we can see an increase in the profitability of the business. Not to forget the confidence boost a business or an entrepreneur will have when there is zero debt.
Prioritize payments based on the rate on interest. Ones with high interest rates should be settled first. Also pay them on time, there might be unsustainable penalty charges depending on the agreement when borrowed. These costs add unnecessary pressure on the business and profitability.
Manage Positive Cash Flow
A badly managed cash flow will suck up all the cash and leave you with nothing to repay. A business should constantly check itself if its running efficiently. Account receivables for your business should be collected promptly. Trying to aggressively expand while having poor cash flow always has a risk to make you go bankrupt. Always manage a positive cash flow to successfully keep a business afloat.
Growing the sales of your business might not be a possible strategy for every business but it’s worth a try. Using exports or selling your products online or trying any other new avenues to sell more will help you increase your revenues. Some business in the past have increased sales by changing their business models altogether to increase efficiency. Keep looking for new opportunities to grow your sales. In time it will help you settle all your debt.
Remember business bankrupt not because they don’t have assets but because they run out of cash. It is one of the most guaranteed strategy that is being followed by the richest corporate houses to small scale businesses. Selling the assets like unused land, idle machinery or even divisions of company can help in reducing debt. Unlocked value by selling assets sometimes will help you grow faster than the combined cost of borrowing and the asset itself.
Cut Down Expenses
Any expense that does not give you an immediate return or value is considered unnecessary expense. Postpone any expenditure and expansion plans that will impact your cash flow while on debt. Most startups having high cash burn have closed their business in very short time. If you can collect advances for the products or services you sell, then there is no better business than that. Ensure that you don’t sacrifice quality while cutting down on expenses.
Beware of Fraud
Verify that your business does not have any false accounts or fraud claims of debt. It is alright to even double check employees to avoid any embezzlement or theft. It is after all your business and the live hoods of all other employees are at threat if a business goes bankrupt. Make sure to have trust worthy persons to handle your accounts to begin with. Balance your accounts every month without fail.
Restructure your Debt
If all else fails, then the only option left for a business is to restructure its debt. If you can borrow at a low cost than what you pay right now will help the business. Try to convert the debt to equity if you can partner with the right people who can help your business. Ask for credit extension for from your suppliers. The good relationships and network you have developed over time will come of help to you.
When you’re desperate to meet a deadline for a payment or keep your business afloat, the feeling to borrow more may arise. Remember, do not borrow more. Poor management of debt will sink your business and you with it. By executing these business strategies, it is possible to keep a business afloat and manage debt successfully.
If you have any other strategy or tips to manage debt? Share them with Trdinoo in the comments.