Mounting debt can make running a successful business incredibly difficult if not managed correctly.
While most businesses carry a certain level of debt, escalating debt can quickly run out of control leaving you and your business in a perilous financial situation.
It makes good business sense to maintain debt at a manageable level and to take appropriate steps to rein in excessive debt before it becomes a legitimate threat to the viability of your business.
Reducing debt is a worthwhile goal that counts towards the success of your business. Cutting or eliminating debt can greatly reduce the stress that debt entails, allowing you to enjoy a more fruitful and satisfying experience running your business.
If you’d like to get a handle on your finances and begin to reduce debt, consider the following steps.
List absolutely everything
In order to begin reducing debt in business, you first need to get a thorough understanding of all your business finances. This is essentially a detailed analysis of all your incomings and outgoings including sales revenue, fixed and variable expenses (eg rent, utilities, payroll etc), as well as any seasonal (or other variable factors) that may affect the consistency of business income over time.
Once you have gathered this information you can begin to map out your income and expenses on a month by month basis with a view to creating a detailed financial plan for the financial year as well as a two, five, and potentially ten-year business plan.
A detailed financial plan is an absolute necessity when it comes to running a successful business, otherwise you risk floundering without any clear idea of how much revenue you need to meet your business expenses let alone generate a profit.
A profit and loss statement, cash flow statement, and balance sheet are three essential financial documents you will need to prepare and manage in order to run a successful business. If you are unfamiliar with these documents, consider enrolling in an adult learning or basic accounting course to develop your financial management skills.
Look for categories and individual expenses to cut
For the majority of people and businesses, an obvious way to cut debt is to cut back on spending. Knowing which expenses you can cut back without negatively impacting product/service delivery is key. This is much easier to determine once you have a firm grasp on your business finances.
The search for spending cuts should apply not only to small routine items, but also to large purchases and new commitments that may be able to be delayed. For instance, if you require new equipment for your business, look for opportunities to lease or buy essential items second-hand.
Avoid committing yourself to renting office or retail space for as long as possible. Put off any new hires to your business. All of these efforts will serve to keep overheads (fixed monthly expenses) as low as possible.
Use these savings to pay down debt
Taken together, the cuts identified in the two steps above will help free up cash that can be used to pay down debt - or can help avoid taking on debt in the first place. If you already have personal or business debt that you’re trying to pay down, begin with high-interest debt first (such as credit cards).
Once you’ve paid down high-interest debts, move on to lower-interest debt. Finally, once you achieve low or debt-free status, don’t assume this gives you license to begin spending again.
Instead, maintain your habits and direct the savings into cash reserve accounts that can grow over time and allow you to pay for future purchases without the use of outside financing.
Self-finance your operations and growth going forward
This step is critical both while you’re trying to reduce your business debt and as you move forward in growing your business. Once you are debt-free, whether personally or in business, you should avoid taking on future debt as much as possible.
This means paying off all bills in full and on-time. This is easier to achieve if you can keep your overheads low. Try to self-finance big purchases as much as possible, either by using lease-to-own programs, buying second-hand, or forgoing purchases until you can afford to pay cash.
In the parlance of modern start-up companies, this is known as “bootstrapping”; and for many young or growing companies, it is critical to their long-term viability and success.
Reducing debt through effective financial management is a worthwhile goal both personally and in business. Doing so helps to reduce stress allowing you to find more satisfaction in your work. Reducing debt also increases the odds of success in business by eliminating the fees and monthly carrying costs associated with most debts, which can weigh heavily on your company’s finances.
Reducing debt allows you as a business owner to keep a much larger portion of your gains once success comes. And perhaps most importantly, reducing or eliminating debt allows you to work for your own gain, rather than for the benefit of creditors.
Partner Content by: Capstone Financial Planning