A debt-management plan helps cash flow and puts your mind at ease
Seasonal fluctuations can see you flush with cash one minute and struggling to deal with your vendors’ invoices the next. It’s a problem that can overcome small business owners and contribute to many sleepless nights. Managing your debt is the key to making sure it doesn’t overwhelm your business or you.
Set a goal to be debt-free. If you have a few larger outstanding loans, it helps to set a goal of when you plan to have them repaid. Break it down into monthly objectives of what the balance will be reduced by. Having some debt management goals will help you gradually pick away at the outstanding amounts.
Divide your debt between short-term and long-term. Cash flow issues will generally arise from repayments falling due when you least expect them. Review your debt situation and determine what has to be repaid during the coming twelve months (expiring loans and credit cards) as opposed to longer-term debt.
Look at your debt-to-equity ratio. What is your debt as a percentage of your total assets? This is a factor that the banks will always consider and you need to consider it, too. If your debt level is high relative to the amount of assets you have, it will cause the banks to get uneasy and will restrict your ability to borrow further if you need to.
Clear your more expensive debt first. Cut the debt with the highest interest rates. This will normally be credit card debt, which can cost a staggering degree of interest compared to secured debt. Refinancing can be an effective way of consolidating this, but be careful once the credit cards are cleared that you don’t use them to create more expensive debt again!
Look at your serviceability. This is your ability to meet your regular interest payments and is normally expressed as a ratio. For example, if your profit is $100,000 and your interest costs each year are $20,000, then your serviceability ratio will be 5 to 1. A healthy ratio increases your chances of securing additional funding.
Look at refinancing options. Are your current debt arrangements the best that they can be? Refinancing gives you the opportunity to secure more favorable terms or interest rates or alter your periods of repayments to suit your cash flow.
Maximize your tax deductibility. Some debt you have may be of a personal nature whereas others will be business-related. How you structure your debt can be a factor in determining whether it can be tax deductible or not. It pays to get your debt reviewed by a qualified tax specialist who may be able to suggest ways to set yourself up for maximum tax advantage.
Debt management is about prudent financial responsibility and being aware of the situation before it gets out of hand. Make sure you take the time to control the situation before it ends up controlling you.
This article originally appeared in the March 2017 edition of INSTORE.