Debt, when managed responsibly, can be an effective tool for the following purposes:
- Financing Expansion
- Buying Equipment
- Smoothing out Cash Flow
However, poorly managed debt has the potential to create devastating financial distress. As such, we’ve put together some of the most important debt management tips:
Know Your Debt Situation
You need to first know your current debt situation. This involves listing all your debts, including:
- Loans
- Lines of Credit
- Credit Cards
- Any Unpaid Bills to Suppliers (Trade Credit)
Calculate key ratios such as the debt-to-asset ratio, which is the total debt over total assets, and the debt-to-equity ratio, which is the total debt over owner’s equity. This will give you the leverage status within your organisation.
Create a Realistic Budget and Cash Flow Projection
Having a realistic budget and cash flow projection is also crucial to managing your debt. This involves the following:
- Projection of Income and Expenses
- Estimating your Expected Income and Expense over a Specific Period (month-to-month or quarter-over-quarter)
Most importantly, ensure your budget has decent provision for taking care of debt servicing on
Time by budgeting for the activity.
Payback Debts
Prioritise by interest rate and pay off high-interest debt first to save long-term interest costs. Consider the collateral supporting the loans. Secured loans, such as loans against company assets, may involve a greater risk of losing assets in case of default.
Notify the Lenders
If you see difficulties in making your repayments, contact your lenders as soon as possible. They might consider renegotiating changed conditions, such as longer loan terms, or reduced repayments in The short term..
Some lenders also have specific programs which will assist businesses in financial stress, so enquire about hardship assistance.
Monitor and Review Regularly
Managing debt is an ongoing activity. You need to monitor your level of debt, cash flow, and financial performance on a regular basis.
Always change your budget and debt management concepts as necessary .
Seek Professional Advice
Don’t be afraid to seek help. Accountants may help you analyse your finances and prepare a budget. They will also make certain relevant suggestions regarding debt management. Financial advisors will help you about debt consolidation, refinancing, etc.
Getting on top of your business’ debt doesn’t have to be scary. Glace Consultants can help you devise a plan to address your debt. Don’t delay- contact our staff now for a discussion.
