How To Overcome Debt For Your SME
Debt can be helpful financial sources both at a corporate or personal level. Debt in the form of a business loan, business credit card, or line of credit can be strategic means to finance a business and to undertake vital operational tasks such as hiring the best hands, purchasing necessary infrastructure, financing growth strategies and so much more.
While debt can be helpful, too much of it can put a business at huge risk. Debt can sometimes be hard to get rid of but a clear understanding of debt management principles can help small business owners navigate the tough waters and achieve the smoothest sail possible. Here are possible ways a business manager can overcome debt:
Re-assess Your Budget/ Cut costs
A clear knowledge of the financial position of a business is the first step in debt management. Performing a budget assessment that identifies budget operations, income sources, and expenses can help the business owner formulate an action plan for achieving its objective of debt reduction. In simple terms, you need a master plan of how you intend to eliminate debt and a great tool is your budget.
The assessment of the budget would shed light on operating costs and expenses that the business can do without or cut down. It is important to keep the budget tight, particularly where there is dire need to reduce debt levels. Cutting costs is a proven way to increase cash flow and check debt.
Increase Revenue
Having taken a cursory look at your overall budget, you can also explore the revenue side. In other words, as opposed to striving to keep cost down, you can simply strive to significantly increase revenue to have more than enough means to eliminate debt. To achieve this increase in revenue, there is need to devise tactics and revaluate the sales strategies of the business.
You will need to improve on areas that need to be improved within the organization and you may also need to leverage marketing strategies to get more word out on your business. You could also make use of promotions and special sales to encourage your customers to buy more from your business.
However, too much discounting counteracts the ability to increase revenue. Raising your prices is another way to increase revenue. However, this too could pose a challenge as it could mean that you lose a number of your faithful customers or clients.
Prioritize investments
The need to focus on expenses that promote the growth of a business cannot be overemphasized. And investments here do not just mean investing in the stock market or in treasury bills. Sometimes, the most significant investments are those carried out internally.
Investing in areas like staff training and development, purchasing new technology, new research and development, hiring a consultant, etc., could help you reposition your organisation for growth and this growth could eliminate debt in no time. Here, it is important to ensure that you invest in areas that will lead to strong profitability and growth for the business.
Insist on Early Payment/ tighten credit policies
Sometimes, it is not that your business does not have money to pay back its debt. It could be that the business has so much money out of its reach that it struggles to get by. In a case where the business has funds being owed to it by its customers and clients, it might need to push to get them or tighten its credit policies in general. To get money faster, a business needs to get its customers to pay faster.
One good way to achieve this is to shorten its payment terms such that instead of accepting a 90 days payment term. A short 45 days payment plan for future purchases can be implemented because the longer the payment terms, the longer it will take for the business to get paid. More so, a business can get more money by tracking down late-paying customers.
This can be achieved by a review of all outstanding invoices and contacting such clients, reminding them of the bill. Collection letters can be issued, and if attempts to collect does not work, it is safe to consider hiring a collection agency.
Use sound debt repayment strategies
There are so many debt repayment strategies available for the company to leverage. One of such is what is known as the ‘Debt Snowball’ method. The debt snowball is a debt repayment strategy popularized by financial guru Dave Ramsey and it is very simple to operate. It requires that you write out all your debts in the order of smallest balance to biggest balance.
Having done this, it requires that you pay up the smallest ones so as to mentally see a reduction in the amount of debtors the business has, while also servicing the larger ones little by little. Another method is to do the reverse, paying up huge debts first and smaller ones later. You decide what works best for your business given the nature of things. However, you must have a plan or strategy on how to eliminate your debts completely.
