Debt is almost a dirty word in the world of business, with directors often doing all they can to avoid it; as if having any amount of debt will somehow lead to the company’s downfall. While being in a small amount of debt may be unavoidable, if your balance sheet is regularly tilted more towards the red, it might be time to think about taking the necessary steps to reduce them.
Cut down your expenses
It might sound like the most obvious piece of advice ever, but when running a business, losing track of your outgoings is easier than you think. You could even have outgoings that are no longer required, for example; services or premises that are too large for what you need. All of which can be an unnecessary drain on your finances. Even if you are covering all your outgoings now, if the business hits a dry spell and becomes short on cash, some expenses may become unaffordable.
You should regularly take stock of all your outgoings; overheads, hiring, staff, etc., evaluate what you’re spending, and potentially shop around for lower-costing alternatives. Doing so could save you a pretty penny.
Make sure you’re paid on time
One of the most common signs of increasing amounts of debt is the inability to pay your bills on time. However, if your balance sheet shows unpaid invoices or outstanding amounts from clients, you shouldn’t ignore these as they can negatively affect your cash flow.
It’s therefore, a good idea to maintain a positive relationship with your clients and those you supply to; being on good terms means any instances where you might need to nudge people for payment shouldn’t be as awkward.
If you have multiple clients late paying their invoices, your cash flow is likely to take a hit, which could harm your credit file. Should this become a problem, you can apply for invoice finance to help bridge the gap.
Maintain a positive relationship with your creditors
While it’s always a good idea to build positive relationships with your clients and those who’ll be paying you, maintaining relationships with those who you owe is arguably just as important. For example, your business may encounter a period of negative cash flow or lose a large contract, impacting your ability to pay on time. Your creditors may be more understanding, and less likely to resort to debt collection methods if you’re on good terms.
Consider a repayment plan
Sometimes a business can have so much debt that it risks becoming insolvent, or unable to pay its liabilities when they’re due. If left unchecked, this level of debt can even lead to the winding-up of the company through compulsory liquidation. Thankfully, there are several repayment plans available, both formal and informal that allow insolvent companies to repay their debts at an affordable rate.
Although a small amount of debt is unlikely to sink a company, you should keep an eye on it to ensure it doesn’t grow to a stage where it becomes problematic. Before you run into more serious issues, you should make sure your expenses are necessary and sustainable, both in the current working climate and if you encounter any financial difficulty. Keep an eye on your income too, and make sure anything you’re owed is paid on time. Having a positive relationship with your creditors can help if you do fall behind on your liabilities, as they may be more understanding. If your debts become severe enough to make your company insolvent, then you can explore the options for a formal repayment plan.