How to Manage Debt

Debt is often negatively perceived and whilst it can be problematic, it isn’t necessarily a bad thing. In fact, it can be a useful tool to grow your business. The most important thing is for companies to know how to keep their debt under control. So, here is our guide on how to manage debt.

Understand your situation and amend your plan

If you notice that your business debt is continuing to increase, it is important to continually monitor and scrutinise it and ensure that you have a plan and take action to stop it getting out of control.

Know the risks

Debt always involves a level of risk and to some degree, risk is something that comes hand in hand with running a business. Whilst it is important to have a plan in place there are some things that businesses cannot easily plan for. Events such as pandemics, natural disasters, or recessions are difficult to prepare for and sometimes impossible to predict. However, by having a plan you can at least have a sense of some control or at least an awareness of what your current financial situation is. Whilst you cannot be too cautious in your planning, as this can impede growth, you need to understand the risks and know at what point you need to take action.

Use accounting software to stay on top of debt

Good quality accounting software can be a lifeline for your company and managing your debt. It makes it much easier to keep a close eye on your financials and can provide you with an invaluable real-time snapshot of your financial situation. A big warning sign is when a business starts to miss payments. This usually causes their debt to quickly spiral out of control. If the situation is severe, this can lead to loss of staff, business assets being seized, and even government intervention. The key to avoiding this is to always know where your business is financially so that you are always aware of your situation. Accounting software is vital for this because it easily keeps track of outstanding debt, monthly payments, and much more.

Consider timings of payments carefully

Some debt is acquired due to poor cash flow and whilst it depends on the nature of the business, a lot of businesses will be able to strategically time payments to best keep debt lowered.

Prioritise payments

It is imperative you have an order of priorities when it comes to payments. Think about which suppliers need paying first. Which costs are the most flexible? What is the penalty for late payment? Here are some main things to consider:

• Staff salaries – you must have enough funds to pay employees on time. If not, you risk them leaving and other penalties.
• Negotiate contracts – you may have some suppliers or clients with when you will be able to negotiate the payment terms.
• Utility bills – Not only do utility bills keep your premises running, but they can also affect your credit rating if you pay these bills late.
• Always consider the credit terms of your payments. For example, if there are interest rates on business credit card purchases, make sure these are accounted for as they can quickly spiral. Look at changing to a 0% card.
• HMRC – If you are struggling to pay any tax, consider calling HMRC to organise a payment plan.

Again, accounting software can be used to help you create your priority and therefore help improve your cash flow. If you are not already using accounting software, or feel that you are not using it to its full potential, then you should address this.

Look at your bank loans

You potentially can renegotiate your existing bank loan to spread it over a longer-term. Whilst this won’t be possible for everyone, it is something you ought to explore. Be prepared for the bank to charge a higher rate of interest due to the perceived level of risk.

You may also be able to consolidate your loans if you have more than one. This could help reduce monthly costs and not negatively affect your credit score.

Increase revenue and/or raise funds to pay off debt

This is clearly not a simple thing to implement. However, there may be some ways a business can boost revenue in the short term which can help reduce business debt. For example, could you run a promotion for a limited time? Meet with your accountant as they will be able to offer you some advice on what avenues you could explore.

You may also want to consider raising additional funds. This can be difficult when your company has debt however it doesn’t mean it’s impossible. Do you have any assets that could be liquidated? Are there any investors that would be able to provide capital? Of course, investors that are backing a business debt will inevitably want a higher percentage stake.

Whilst it can be an awkward situation and added stress to a relationship, another option is to ask other people you know to borrow funds.

Some of these choices are more appealing than others and completely depend on the individual and business, their financial information, and what works best for them. However, all options are worth consideration.

Reduce business costs

There are probably some areas where you could easily cut costs and some of which you may not have considered before. For example, could you reduce the space you are renting? You could also negotiate with suppliers and ask for discounts, especially if you are buying in bulk. A last resort could be to consider making employees redundant or cutting their hours. Whilst this option shouldn’t be taken lightly, it can make a huge impact when it comes to cost-saving.  Obviously, you should take legal advice if unsure.

Whenever you are considering cutting costs, you shouldn’t make rash decisions. Whilst you are wanting and needing to save costs in the short term, you don’t want to stop potential growth in the future. For example, it can be common for companies to cut back completely on their marketing activities. Whilst this saves money in the short term, they are risking the chance of losing potential future customers who could provide much needed income into the business.

Whilst debt can often be inevitable for many businesses, it doesn’t have to be a bad thing, especially if it is managed correctly. Companies that stand the test of time will go through ups and downs and at some point will have more debt than at other times. The points mentioned in this article show that debt doesn’t have to be the end of the world. The key is to understand how much debt you are in, what type of debt it is, and have a plan in place to help you tackle this debt. The worst thing you can do for your company is bury your head in the sand and pretend the debt isn’t there. Instead, you need to embrace the fact that debt can be beneficial and it can even help your company thrive and grow- as long as it is managed correctly.