All companies can expect some debt while trading; start-up costs and expenses to cover expansions are likely to make a dent in finances.
That said, companies should aspire to be in as good a financial position as possible, and debt of any kind will hinder those efforts.
As the old saying goes; ‘prevention is better than cure’. So here are some simple ways to keep your company out of debt.
Maintain a level cash flow
Cash flow is the amount of money coming in and going out of your business each month. In ideal circumstances, the money coming in from client payments and sales would substantially cover its outgoings. Although keeping your cash flow positive should be high on your finance department’s priority list, positive cash flow isn’t the same as profit.
Monitor your cash flow closely and keep track of your books, make sure you know exactly when your invoices are due, and how much income will be coming from works in progress (don’t blindly rely on perspective payments though). There are options for fixing a problematic cash flow, such as refinancing or selling off assets.
Keep sales healthy
Most companies wanting to be successful will aim to keep their sales healthy to generate positive cash flow. If that cash flow suffers a downturn, you should consider looking at sales reports and see what is and isn’t selling. Focusing your efforts on your most profitable products, and finding out why the products making less money aren’t selling as well could help increase your sales.
Keep in touch with your creditors
Your creditors are people and companies to which your business is indebted. Paying these people on time keeps relationships between these parties healthy.
If you’re struggling with covering your outgoings, you could be tempted to defer payments to improve the cash flow. Doing so is ill-advised, as not only could this harm your relationship with the client whose invoice you’ve chosen not to pay, but depending on the size of the debt owed, or if this isn’t the first time you’ve missed a payment, the creditor could pursue legal action to recover it. If you’re not going to be able to pay an invoice on time, it might be worth letting the creditor know before the billing date. Although the creditor probably won’t be too happy about a delayed payment, they may be more understanding if told in advance. They may even allow you to pay larger invoices in instalments.
Only buy what you can afford
During busy periods when cash flow is healthy, it can be tempting to splurge on expensive supplies, more staff and other extras that seem like a good idea at the time. Sadly, this is a mistake a lot of companies make, and when sales slow and the company enters a ‘dry period’, these extras become unaffordable and can leave the company struggling to justify them. You may find yourself making cutbacks and redundancies to recoup the costs.
Buying items on finance can be tempting as it spreads the cost over months or years. Consider the interest on the policy though, as you could end up paying more in the long-term if the interest rate isn’t zero.
Keep borrowing to a minimum
Most businesses will have to borrow money at some point, often to cover start-up or expansion costs, or to invest in the company for the long-term future. Bridging loans, invoice finance and commercial finance are there for a reason, and while borrowing isn’t inherently bad for a company, it needs to be monitored to make sure you’re not borrowing unnecessary and harmful amounts. It’s far too easy for a company to keep borrowing to repay debts, which, coupled with the associated interest, can lead to more debt and a deeper hole that’s more difficult for the company to escape.
Unchecked, debt can destroy a company. But if you identify the problem early enough, you can take the necessary steps to minimise the debt and save the company from insolvency. If you’re still struggling and there is a real risk that the company could go under without further action, you should contact an insolvency practitioner, who’ll be able to offer further advice and services to alleviate your debt and keep the company trading.