5 Effective Debt Management Strategies

Take control of your liabilities to shape the future of your business and sleep better at night. Let’s take a look at five debt management strategies to help you grow with confidence.

1. Rework Your Business Budget

Before diving in to attack your company’s debt, learn all you can about your current financial situation. Many times, business owners embark on this step when they’ve fallen behind on monthly payments. Look at your past financial plan and rework your budget to give yourself more breathing room.

A business budget should identify your income sources, variable expenses and fixed costs. It is also a good idea to include a cash flow budget to take into account expected transactions outside of the profit & loss including loan repayments, ATO obligations and returns to owners. A budget should help you to establish the helpful habit of laying money aside to pay suppliers, creditors, your landlord, the ATO and other predictable expenses.

The professional advice of your accountant or business adviser can help you to fine-tune your budget.

2. Improve Your Cash Flow

Even in a profitable business, poorly managed cash flow can cause major problems including difficulties in meeting obligations on time.

What kinds of strategies can you use to improve your cash flow?

• Measurement and forecasting – comparing actual results to your budget, understanding and addressing the reasons for any variances, and revising forecasts on an ongoing basis will keep you in touch with your business cash flow and upcoming cash requirements.
• Improving management of payables and receivables – ensure that invoicing for products and services occurs on a timely basis and review credit terms offered to customers to collect cash for sales faster. Review aged receivable reports regularly to chase up overdue amounts. Setting up automated payment reminders and convenient online payment options via your cloud based accounting software is another easy way to boost cash collections. Consider firmer action for accounts that have become problematic.

  On the payables side, you may be able to negotiate extended payment terms or better deals and pricing with your suppliers.

• Improving inventory management – for manufacturing, wholesaling or retailing businesses in particular, carrying excessive or slow moving inventory can be a major drain on cash flow.
• Cutting costs – reviewing your expenses and identifying areas for savings (that won’t impact on the objectives of the business) can also free up additional cash.

Once you’ve improved your cash flow, you can start to plan how to best allocate the additional funds you’ve freed up.

3. Review and Prioritize Your Debts

Review all of your outstanding liabilities and start to prioritize and plan how to pay them down. These may include (in no particular order):

• Bank loans, asset finance or overdrafts;
• Employer obligations including Super Guarantee (SG);
• Suppliers;
• Revenue NSW (or other state OSR) liabilities including payroll tax;
• ATO debts including:
  – PAYGW
  – GST
  – Income Tax.

It is important to be aware that certain liabilities may have highly adverse consequences for late payment – for instance, employer Super Guarantee contributions are generally due to be paid to each employee’s chosen fund by 28 days after the end of each quarter and there are significant ATO penalties that apply for missing this deadline by even 1 day.

In addition, certain ATO debts incurred by a Pty Ltd company can be the subject of a Director Penalty Notice, making the directors personally liable for the outstanding tax liabilities of the company. It is therefore important to ensure that lodgments are kept up to date and that a business struggling to meet its tax payments engages with the ATO on the issue – an experienced accountant can be a big help in negotiating payment terms with the ATO.

The tax deductibility of interest on certain debts will also be a factor in determining priorities for repayment.

4. Review Loan Terms & Consider Refinancing

Interest rates are at historic lows so now is a good time to review your loans and ensure you are getting a competitive deal – the savings could be significant.

Refinancing can also provide an opportunity to restructure debt in various ways e.g. by consolidating multiple loans into a more manageable single facility, changing loan durations or optimising tax deductibility of debt.

Of course, it’s easier to pursue these angles before any issues arise as a business that is profitable with a good credit record will find the going much easier with lenders. In the event things are not going so well, it is still better to engage with the business’ financiers on a proactive basis to see what help can be negotiated.

5. Increase Your (Profitable) Sales

In addition to improving your budget and cash flow, prioritizing your debts and reviewing your loans, you might look to understand the profit drivers in your business and focus your energy on increasing sales in the most lucrative areas of the business.

Many business owners get too focused on top-line revenue and don’t realize that in some cases they may in fact be losing money on some products, services or customers!

A detailed review of profitability can sometimes highlight that a business needs to review its pricing – or in some cases it may in fact be better off dropping a particular product, service or customer if they are unable to realize a high enough margin. Unprofitable work can be a cash drain not only as it is not making money, but as it can tie up working capital. Further, assets that are no longer required for operations may be sold off to further assist in paying down debt.