Managing debt can be incredibly stressful and time-consuming as a small business owner.
In this guide, we will take you through strategies to manage your small business debt, ensuring you can stay on top of your expenses and get them in order before it becomes an issue.
What is Business Debt?
Business debt refers to the debt you’ve taken on regarding your business, whether opening a business bank account, using a computer for work purposes, or any other expense directly related to running your business.
Therefore, if you have a small business, you will have business debt. This type of debt can be good or bad and mainly depends on how well you manage these expenses. For example, debt is less risky than equity, as you have to pay the debt back over a certain amount of time.
Three Ways to Deal With Business Debt
Now that you know what business debt is, let’s consider the best ways to alleviate the stress of substantial business debt;
- Understand Your Business’s Efficiency Regarding Debt Payments
If you have financial plans and goals, such as applying for a loan, it’s crucial to understand how well your business pays back money. You can work this out by calculating your debt coverage ratio, and this sum will help to determine if your business can generate enough money for payments.
Divide your net operating income by the debt service to complete the sum. As a smaller business, it’s more likely your ratio will be lower, with a ratio below 1 signalling you could be facing difficulties with debt.
Although it may be alarming to find your business has a ratio lower than 1, you can turn this into a positive by looking at ways to increase your cash flow and put your company in a better financial position. Knowledge is power; developing this understanding and doing analytical work will significantly help your debt management.
- Increase Cash Flow
Leading on from the above point, increasing your cash flow will be an excellent place to start if your business debt is becoming unmanageable and making it more challenging to make a significant profit. A great way to increase your cash flow to pay down debt is by increasing productivity, whether you train employees or invest in more efficient technology.
With cash flow, sometimes you may need to increase costs in the short term to see business debt decrease, as investing in resources and marketing will grow your business profits, which you can use to pay off debt.
- Negotiate with Suppliers
Managing your accounts payable will make mitigating the debt level your business has easier. While you may have already settled on specific payments with vendors, there will be possibilities to lower these costs once a relationship has been formed, helping you to increase your cash flow and reduce your debt due to discounts or finding more affordable alternatives with better pricing.
Are You Looking For Better Ways to Manage Your Business Debt? We Can Help
We know how stressful it can be if you’re in a rough patch with your business debt, and we offer business advisory services to help navigate you through these issues. Get in touch today by calling Accounting Tax Solutions on 07 5559 1200 to find out more.