While the term ‘debt’ generally has a negative connotation, it is a part of the normal business cycle for most companies. It is especially important at different times in the company’s life, such as during start-up and any expansions. However, it can also keep a business afloat during short-term cashflow gaps.
The reality is that debt isn’t always bad; it can be great if it’s helping your company get to its next stage. However, effectively managing debt is crucial. Without this skill, debt can quickly get out of control and tank your company’s future. The following tips demonstrate great ways to approach debt management for any business owner.
- Know exactly what you owe. While this sounds like a basic premise, once you start taking out lines of credit, it can quickly become difficult to track how much you owe to each lender. Keeping a detailed list or spreadsheet with each lender’s outstanding balance is a good way to keep track. You can also include other details, such as the interest rate being charged and your expected monthly payments, which can be important for budgeting purposes.
- Keep close track of your budget. It can be easy to think that you need everything to make your business run more smoothly, and this mentality gets a lot of business owners in hot water. The reality is that you should only be including vital expenses until your budget allows you to make discretionary or expansionary purchases. To do this, you must understand all of your fixed and variable expenses and your income sources. Understanding the budget can help you anticipate changes and fluctuations, which allows you to prepare financially. This process minimizes the amount of debt you may require, which can also save you a ton on interest charges.
- Prioritize repayments. When you take on debt, you agree to repay it at a certain interest rate. Most companies have many debts, including bank loans, leases, contracts, or even credit cards. Each of these debts comes at a cost, which can vary greatly. For example, bank loans are much harder to get but often have an interest rate far below credit cards. For this reason, you should prioritize debt repayment with high interest rates or those with big late fees. This process will help you save money in the long run.
- Consolidate debt. If you are already in a situation where you have multiple lines of credit open, it may be beneficial to consider consolidating that debt under one loan. Debt consolidation can help lower your total monthly payments, provide a longer repayment term, and lower your overall interest rate. Debt consolidation is often the first step in creating a larger repayment plan to help turn things around and get your business out of the red.
- Create a repayment plan. When you have debt, you must plan to pay it off. If you don’t create this plan, it’s easy to kick the can down the road and believe you will pay it next month. And before you know it, interest charges and additional credit needs can leave you owing much more than you expected. Most people repay a debt by prioritizing higher-interest debts or paying off smaller ones first, then tackling larger ones. Whichever process works best for you should be the one you choose, but the key to success is discipline. Develop a repayment strategy and stick to it.
- Spread out tax payments. One of the biggest debts many companies have is the quarterly tax payment to the Internal Revenue Service (IRS). Paying three months’ worth of taxes in one installment can be challenging. And if you don’t adequately plan for this payment, you can find yourself needing to take on debt. However, recognizing the problem early is a great way to identify alternatives. Some companies work better with a monthly tax payment. These smaller chunks aren’t as much of a financial burden, and it’s easier to consider them a monthly operating expense.
- Renegotiate loan terms. Loans often represent the largest chunk of total debt for a company. While you agree to certain terms when you sign for the loan, they may be renegotiable if you have been diligent in making payments. You can also refinance your loans if you find that the current terms are no longer competitive.
Debt management is a crucial part of running most businesses, but it can be time-consuming and confusing for many owners. Working with a reputable accountant is one of the best ways to effectively manage debt and ensure that all outstanding debt is working in your favor. To learn more about debt management, contact Parker Business Consulting today.
Parker Business Consulting & Accounting, P.C. is a unique firm with more than a combined 75 years of experience in private industry, coupled with a strong background in public accounting. This combination enables us to provide valuable assistance based on direct experience with many of our clients’ same issues.