Debt is an essential driver for growth in many businesses, and maintaining a sustainable level of debt as you grow can be a healthy way to finance your expanding business. However, having an unsustainable level of debt is all too common especially among small businesses. Every business should have a debt strategy that outlines how much debt is sustainable and how to manage or reduce debt.
Identify causes of debt
Start by identifying how you got into debt in the first place and start from there. Whether it’s due to poor cost management, a flawed expansion strategy, or some other factor, work with your accountant or financial advisor to check your records and find out the key causes of your debt situation, or what’s making you accumulate debt.
Once you’ve identified how and why your business debt has accumulated, you can then formulate an effective strategy for reducing your debt or ensuring that it stays at a sustainable level, even if you’re growing and scaling up your business.
Target debt as a key business priority
If you define it, you’re much more likely to be able to achieve it. Explicitly prioritise lowering your debt load as a key priority and set clear limits by identifying how much debt is acceptable for your business in the coming year. Work out how you could keep costs down to achieve your debt goals. If your goal is to pay down debt, set goals for how much you’re seeking to pay down your debt. Identify the highest interest debt products and pay these off first.
Constantly eliminate costs
Constantly be on the lookout for opportunities to eliminate or reduce costs. Set aside a time every month to work through your financial records and to assess what you can reduce. Audit your books and identify every chance to minimise costs. Encourage staff with a culture of achieving cost efficiencies around the workplace.
If you have unused equipment, lease it or sell it for an immediate windfall that you can put towards reducing your debt. Always shop around and negotiate with suppliers to drive your costs down. Have a procedure for switching plans or service providers with ongoing costs such as internet, energy, and raw materials.
Take a long-term view and work out the causes of your business debt. If it’s poor collections and non-paying customers, work out a policy to address these on a constant basis.
Refine your business budget
Refine your business budget to take control of your outgoings and save more to pay down your debt. You might think you have a clear idea about how your business is spending its profits, but only an accurate business budget can provide a full picture.
If you don’t already have a budget, work with your accountant or bookkeeper to generate a detailed budget that includes all of your periodic business expenses and your variable expenses. Compare this to your incomings and work out your profit. Adjust your target figures for the coming periods so your business revenues will be more than enough to pay off your ongoing costs and pay down your debt. Use tools that simplify the process, such as accounting software.
Boost revenue and sales to pay down debt
Look for ways to boost revenue and sales quickly so you can direct more funds towards reducing your debt. Some of the key ways to do this are increasing productivity through stronger efficiencies, investing in high-ROI marketing campaigns, and optimising inventory turnover.
Higher productivity means your business generates better output and revenue from the same inputs. Making your marketing dollars work smarter is another way to improve sales and revenue without increasing costs. For example, you could review your marketing metrics and work out how to focus on specific high-margin demographics or product lines.
Optimising inventory turnover allows you to get rid of slow-moving and stagnant stock to generate cash right away. Investing in technology can be another way to boost productivity, but these solutions will mean short-term costs for longer-term gains.
Consolidate your loans into the one product to make your debt more manageable. You could end up with a low-interest loan if you consolidate your loans and find a more competitive product. While the difference might be only a few percentages over the course of a year, it could save your business thousands of dollars or more.
You could pay off your debt or ensure it’s at a manageable level if you effect a clear plan to target your business loans. However, sometimes wider market conditions and business structural issues make it difficult for you to successfully manage your debt and stay solvent. In that case, consulting an expert in voluntary administration can help provide more options to turn your situation around. Acting quickly could make all the difference for your business survival.
Jasper is passionate about finance, investment, crowdfunding and Cosmo Kramer. You can follow him on Twitter.