
Effectively managing debt repayment requires proactive planning, disciplined cash flow management, and strategic actions to reduce expenses and increase revenue.
Primary Implication
Making cash available to the business is the most critical concern for management because everything any business does over its existence depends on available and predictable cash flow. Carrying too much debt can cause you to lose control over your cash.
Fall behind in your debt repayments, and you will quickly find yourself in financial trouble. Apply the principles of the Business CPR™ Management System to increase your cash flow from profits to lower your debt burden and reduce your stress.
Overview
Planning for profits and cash management is the foundation of debt repayment. The quality of your Cash Flow from Operations creates profits you can use to repay debt. Failure to earn profits puts you at an increased risk of insolvency proceedings (legal action) being taken against the assets that may be liquidated to pay off outstanding debts.
Whether you are struggling because of late-paying customers or going through a sudden drop in business revenue, multiple issues can make business owners overburdened with debt. Particularly when you find yourself owing your creditors more than the value of the business assets, you need to
adopt the following ten tips to manage your business debt repayment:
- Perform weekly cash management. Knowing what your cash outflows are creates a clear view of the business’s amount of cash obligations. When your cash inflows exceed your cash outflows when you have the money, you can go back into the business or use it to make extra payments on bills to eliminate debt. The fastest way to achieve this business dynamic is to eliminate unnecessary spending immediately and only purchase what you need.
- Make sure you aren’t overspending on the payroll. When cash is tight, and creditors are becoming increasingly aggressive, payroll is often the owner’s focus. Yes, if people don’t get paid at the right time, they won’t come to work. The problem with not reducing your workforce when cash is tight is that you find yourself quickly in the “borrow from Peter to pay Paul” method of juggling payments to suppliers, vendors, and lenders as you focus on clearing payroll. Don’t do this. Reduce your staff to what your business can afford today, not what you think it will need in the future.
- Pause all investing so you can prioritize the debt payoff process. For loans, leases, credit cards, and other types of debt, arrange the debts according to the interest rate the business is paying on the debt. Use your cash management tool to help you make additional payments against your credit cards, loans, and debts with the highest interest rate first.
- Don’t take on any new debt—close newer credit accounts. You only need four open credit accounts to maintain a positive credit history. Once you have the balances paid off on any accounts that are less than a year old, close the account if it exceeds the four accounts you need to maintain the credit history.
- Don’t treat all debt as created equally. Ask yourself what would happen if you didn’t pay a particular debt and make decisions about prioritizing your debts based on the seriousness of the consequences. The more unpleasant the result, the higher priority the debt is.
- Use your monthly profit plan to manage your business better. Knowing what your COGS should be as a percent of sales and how much you can afford to pay in SG&A to earn the profits you should is how you realize the profits you need to make to pay off your debt. Variances in your actual to planned results show you where you need to intervene to stop the profit losses that are causing you to spend more than you planned. Every dollar you divert from waste to profit is a dollar you can use to pay down your debt.
- Negotiate with suppliers, lenders, and creditors. See if they will negotiate the balance due if you pay the account off in full. Some creditors are willing to reduce the total balance due to receive their money now rather than later. It won’t work with all the business accounts, but it’s worth the effort to eliminate some of your debt up-front so you can work on eliminating the rest.
- Formulate a plan to increase revenue. Offer exclusive savings deals for existing customers or introduce a new product or service offering to generate more income for your business. Offering a special sale may decrease the income you generate per product or service, but sales can help increase the volume of your sales, which means you bring in more money today. Use the additional money generated to pay down and pay off the high-interest rate debts first and continue to pay debts off until your operating cash flow easily covers your debts.
- Recognize what business stage you operate. Start-up businesses are highly reliant on the founders’ initial investments. As the business expands, it will most likely seek other types of investments from leases, loans, and venture capital firms, depending on its prospects for going public. Once a company matures, potential investors are less inclined to buy ownership stakes in the business, because expected growth has slowed. At the same time, lenders are likely to be eager to loan money cheaply because the company has steady profits and solid collateral. Mature companies, therefore, are more likely to rely on debt.
- If your creditors won’t work with you, then seek outside help for relief through loan consolidation or debt restructuring. Allow the experts to create a payoff and elimination debt plan for you that they will then help you to implement to get out from under an excessive debt load. This is particularly important if you have a personal guarantee to repay credit issued to your business using your personal assets if the business cannot repay the debt.
A business becomes insolvent when it cannot meet its debts as they fall due and has assets worth less than the total amount it owes. Protect your business from this financial distress by having a plan in place to repay a debt before you take on the debt.
The failure to repay debt is a business model failure. Every business is built on selling a product or service to people with a need you can serve or a want you can satisfy. Your ability to solve your target customer’s problems better than your competitors is how you maximize sales and profits. The bottom line for all business models is to shape your offer at a price that earns you a profit. Anytime you struggle to repay debt, your business model isn’t performing as it should.