Debt is a normal part of doing business. Every company will have some debts that must be managed on a regular basis, and good debt management is about always being aware of the debts you have and dealing with them in a timely and structured manner.
With that in mind, the following are some areas company directors could focus on to effectively manage your company’s debts, along with some debt reduction strategies you may be able to put in place if your level of debt is starting to become a problem.
Tips to manage debt
- Invest in debt management software – Staying on top of your financial situation is the key to good debt management. And the best way to do this is to have good quality accounting software in place which can provide you with a snapshot of your regular payments and outstanding debts at the touch of a button. There are plenty of corporate debt management software packages on the market, and investing in the right solution now may bring a significant return on investment (ROI) in the form of future financial stability. Examples include IODM, Magiq Finance, Debtware and MomentumPro.
- Learn good accounting practices – As a company director, it’s likely you leave most accounting practices to those who are trained as an accountant – but ultimately it’s your responsibility to know enough of your books to know where your company is positioned financially. So learning the basic principles of accounting and budgeting can help you to keep your finger on the company’s financial pulse, and could forewarn you of cash flow problems as they occur and before they become a legal issue.
- Prioritise your debt payments – One of the keys to managing debt is to prioritise payments according to their importance, and the consequences if they are not cleared in a timely manner. While payment priority would depend on your individual business, a suggested order of importance might be:
- Employees – Not paying staff on time can impact staff morale, productivity, and retention rates. As this will ultimately affect business operations, it’s essential staff are paid on a timely basis.
- Suppliers – Late payments to suppliers may erode goodwill and could negatively affect future payment terms.
- Outgoing costs – Late payment of rent or utilities may have a direct impact on business operations.
- Insurance – Late payment of public liability or professional indemnity insurance could lead to lapsed cover and the risk of financial disaster in the event of an incident.
- Cards and loans – Late payment may attract penalties and interest charges.
- Maintain good relationships with your creditorsProtecting your company’s credit rating is vital for your future growth, so you should do everything you can to ensure those you owe money to – such as lenders and suppliers – are paid in a timely manner. By maintaining good relationships with your creditors, it will be easier for you to negotiate favourable terms in the future or a payment plan should you find yourself unable to meet your regular repayments.
Tips to reduce debt
If you haven’t been keeping on top of your company’s finances and your debts are starting to accumulate, the key thing to do is to be proactive, rather than doing nothing and hoping for the best.
Some suggested ways to increase your cash flow so you can pay down outstanding debts include:
- Improve productivity – Look for ways to build efficiencies such as investing in employee training or new technology. While such initiatives involve a short-term cost, they can return a long-term benefit in the form of increased output and greater cash flow.
- Streamline accounts receivable – A great way to improve cash flow is to reduce the turnaround time between provision of service and payment. This can be achieved by re-negotiating payment terms with customers, offering incentives for early or prompt payment, and improving your debt collection processes.
- Streamline accounts payable – Just as you can offer incentives for your customers to pay you on time, you can also re-negotiate with your suppliers for more favourable terms such as 60 day payment terms or discounts for early or prompt payment.
- Optimise your inventory – Stock sitting on shelves could be costing you money, so by reviewing inventory, selling or returning slow moving lines and moving to a ‘just in time’ inventory system, you may reduce stock expenditure and free up more cash flow.
- Consolidate your loans – If you have several business loans and lines of credit, you could consider combining them into one low interest loan that will reduce the number of creditors and potentially the amount of interest you are paying.
- Cut unnecessary costs – Go through your company’s expenditure and look for areas where cost savings could be made. This could include office supplies, cleaning services, utility providers, freight costs and marketing, to name a few.
- Prioritise payments – Rather than paying your outstanding debts according to long-term importance as described earlier, prioritise them according to how much interest you are being charged and the penalties you are receiving for late payment. This may reduce interest payments or late fee penalties.