Navigating the financing of a business can be a tricky balancing act. Debt can be a valuable tool for fuelling growth throughout a company’s development stages.
56% of SMEs sought external financing options over the last three years, with an 89% year-on-year increase in private debts compared to 2020. However, ineffectively managed debt can create unnecessary pressure affecting day-to-day operations.
Successful business debt management techniques can help business leaders to utilise debts while maintaining a healthy cash flow or reassess their strategies for a better long-term outcome. A well-managed debt is vital for a company’s health and credit rating, and while debts can be useful, all liabilities require frequent and regular attention.
So if you want to find out the most effective tips for business debt management, read this article until the end.
Six Tips for Effective Business Debt Management
1. Categorise and Organise Debts
Organisations must take action when it comes to debt management. It’s essential to map out each debt owed in detail on a spreadsheet or software and be as specific as possible. Information should include items such as remaining balance, monthly payments, interest rates, due date and what type of credit it is, among others.
Creating a list will enable companies to establish an effective strategy and better understand what payments should be prioritised first. Once analysed, debt payoffs can be approached with different techniques such as the debt avalanche strategy, paying larger instalments towards the debt with the highest interest rate, or the debt snowball, paying off the smallest debt first regardless of interest rate. Both approaches can be beneficial, and if you have access to the correct information, you can choose the most suitable technique.
2. Reduce Spending and Increase Income
Reducing spending and increasing income can be easily disregarded as rudimentary elements of debt management; however, in most cases, these seem to be the most effective parts of the journey.
Freeing up extra cash to go towards outstanding debt can quickly get businesses out of the danger zone. Nevertheless, leaders need to be sensible about their decisions on where to cut costs.
Reducing spending doesn’t always automatically save money.
Let’s take a look at a hypothetical company that is considering cutting marketing spending entirely. Of course, any drastic reduction in one of the most significant business expenses will deliver tremendous results.
But is it a clever long-term solution? Perhaps no, as the business may lose out on landing new clients without sufficient exposure while pushing the organisation further into debt.
Meanwhile, organisations must prioritise essential outgoings such as payroll, bills, suppliers, and business partners.
Certain items can be considered for cost reduction, such as selling non-essential company assets, reducing business overhead like downsizing or relocating offices or cancelling non-essential business subscriptions. A financial partner can help companies forecast the impact of different cost-cutting options so that business owners can maximise their turnover.
Ultimately, for a boosted cash flow, increasing income is crucial. Try to renegotiate prices or contract terms with third-party vendors and providers.
Companies should also assess their target market and create attractive deals and offers to bring in new customers through markdowns or reduced prices. This can help to bridge over short-term cash flow issues.
3. Improve Credit Control Process
It’s hard to find another element of day-to-day operations affecting cash flow more than incoming payments. With an average of 2 in 5 invoices paid with a delay, late payments can quickly clog up finances, but credit control processes should help you minimise these risks.
Improving invoicing processes is crucial to minimising cash flow issues. When taking on new clients, it is helpful to request trade references, as they reduce the likelihood of debt developing on any accounts.
Furthermore, invoices should be raised quickly and accurately in the correct format, ensuring that credit terms and reference numbers are included along with payment instructions. You should encourage early payments with shorter payment terms or early settlement discounts to incentivise clients to pay quickly.
4. Integrate Risk Into The Business Model
As a leader, you should attempt not to be overly cautious when building a business; yet, risk management is vital to success.
Although planning for extraordinary occurrences like recessions, pandemics, or natural disasters is hard, in-depth risk management should be an integral part of any business model.
With a frequent review of profit and loss statements, it is easy to identify areas where companies need to adjust their processes to maximise cash flow and save for rainy days.
As we previously discussed, effective cash flow forecasting and trend tracking are essential to stay ahead of competitors and identify opportunities for the future.
5. Talk to Creditors
One in five SMEs is concerned about their ability to make full repayments. In these scenarios, businesses must have a proactive line of communication with their creditors.
Often, creditors are willing to work with companies to renegotiate terms of debts, such as modified repayments spread over a more extended period or lowering interest rates. The company’s ability to navigate these negotiations will depend on its past payment history and credit records. This should give enterprises breathing space to develop an overarching strategy to tackle debt.
6. Consolidate Business Debt
If meeting re-payments is challenging, consider combining your business loans into one payment to reduce monthly costs through debt consolidation. Refinancing can often result in lower monthly payment terms; however, it may mean paying more interest due to increased loan terms.
Although this approach can reduce the risk of missing repayments, it can often be a more expensive option over the loan’s lifetime. Ultimately, this might stretch the loan over a more extended period with higher interest rates.
Debt management is a sensitive element of business operations. However, at Sanay, we can help you effectively identify opportunities to get ahead with debt repayments and create an effective debt management strategy for your organisation.
Don't wait until your business faces a financial crisis—we're here to help you get your finances under control.