Debt is necessary for a lot of small businesses in order to fund things that are needed to move forward, such as new employees, inventory, or equipment. Debt can truly be a useful tool to start and grow any business, however it’s crucial to monitor your debt to make sure it remains beneficial, instead of overwhelming. Too much debt can stand in the way of your goals and can become unsustainable for long-term growth. These Effective Debt Management Tips for Business Owners can help you keep things in line.
1. Prioritize Debts
Make sure you are not ignoring the debts that you have and are aware of what needs to be paid and when. Review all of the liabilities your business has, including:
- Bank loans
- Business credit cards (as well as interest rates and monthly payments)
- Leases and contracts
- Employee-related liabilities, such as wages, benefits, etc.
- Business taxes
After reviewing the liabilities, it’s important to prioritize them. Make sure you’re aware which have the biggest consequences for late payments or what would be detrimental in missing.
2. Have a Debt Repayment Strategy
There are two common methods for paying off debts quicker:
- The debt avalanche strategy – making extra payments to the debt with the highest interest rate and minimum payments on all others. Once that high-interest debt is paid off, put those funds toward the next debt with the next highest interest rate.
- The debt snowball strategy – paying off the smallest debts first until they are paid off and snowball the amount you were paying on the smallest debt toward the next smallest, until balances are paid off.
Both can be effective, depending on what your business can afford; it’s best to consult your accounting team to see which may be the best to start.
3. Evaluate Your Budget
Are you knowledgeable about the budget that your business follows right now? Do you fully understand the financial situation of your company? Be sure to include all your income sources and fixed costs, but don’t forget to include your variable expenses, as well. Including a cash flow forecast is a great way to take into account expected transactions outside of your P&L.
Ultimately, your budget should help you establish the habit of paying your bills effectively, but should regularly be updated. Your budget should be adjusted as your business evolves.
4. Review Terms of Loans
Are you knowledgeable on the terms of all of your existing loans? It may be a worthwhile endeavor to review all of them and make sure the rates you are paying are competitive. Refinancing can help you to restructure debt to make it more manageable for your business. You can also look into consolidating multiple loans into one source or changing some of the terms, which can make it easier for your business’ needs.
If necessary, reach out to creditors to negotiate more favorable terms. Many creditors are willing to work with borrowers if it means it can help to keep your situation manageable.
5. Increase Income and Reduce Spending
It’s no secret that minimizing your spending will free up funds to put toward debt. It will also help you to avoid taking on new debt. Review all of your expenses and see what you may be paying for that is not essential and evaluate all of your overhead costs to see if there is an area where you can cut back and save money. It may mean you renegotiate contracts with suppliers or reassess insurance policies. Know where your money is going and look for areas where you can make cuts.
Increasing your revenue is also a great (and obvious!) way to provide more funds to tackle business debt. Put on your marketing hat and increase exposure through social media or other marketing channels, or bundle your products for customers, or reduce prices to improve sales volumes. Whether it means introducing new products and services or improving customer service, you know what may be best for your business when it comes to increasing income.
6. Spread Out Your Tax Payments
If you have trouble saving for your quarterly estimated taxes, make it a monthly payment instead. That way, you are treating it as any other monthly operating expense and it can streamline the process for you.
7. Improve Your Billing Strategy
Improving your credit control process can really help your debt management. Almost half of business invoices are paid with a delay, which can quickly clog up your finances. You could create custom-made payment terms, set up automated reminders for late payments, and work on receiving payment on overdue invoices in a timely manner.
If you’re struggling with specific clients on a regular basis when it comes to collecting from them, it may be time to get creative with how you bill them with custom-made payment terms (perhaps a small discount if they pay their bill upon receipt). Regularly make sure you are monitoring customer accounts receivables to stay on top of any pending payments your business is about to receive.
The key to successful debt management starts with bringing visibility and awareness to all areas of your business. Make sure to educate yourself. Conduct regular reviews and make sure you are making prudent organizational decisions with an effective debt management strategy. Don’t wait until your business is in a financial crisis! Contact us with any questions you may have about Effective Debt Management Tips for Business Owners.