A key responsibility of the owner/leader is managing business operations and growth plans. In the best case, a business will generate sufficient cash for these, even dividends to owners. However, since 2020 it has often been necessary to borrow even working capital.
Debt has a place, it’s not necessarily bad. Investments are often made using loans, the cash put to use to generate returns higher than the cost of debt.
How does a business end up in too much debt? Perhaps an investment either did not make the return expected or will take longer to realise gains, personal credit cards or high-interest debt is used, or some of the loans are used for personal purposes. This can mean usual cash flow is consumed by repayments and can lead to failure to pay suppliers, employees, overheads, and the ATO.
Each business is different, but early and decisive action is necessary. Options include:
Improve the inflow and outflow of cash
Connect with customers to sell more, or more often, increase prices, and get paid faster. Any increase in inflow usually means the business has good fundamentals. Reducing the outflow of cash may require renegotiating with suppliers, even asking for deferred payments.
Communicate with creditors/suppliers
Suppliers won’t like surprises and will look for solutions to collect their cash. Their options may be to increase the credit available or restructure repayments. Failure to communicate with creditors will probably make matters worse.
It sounds obvious, but a business with debt, negative cash flow, and no reserves will need to take drastic action. Review every expense, rent, people, waste, vehicle, your own wages or spending, and the taxes paid. These decisions are not easy but may be necessary to find cash to keep operations running.
Reducing the number of loans to perhaps just one may reduce payments monthly and lower the interest rate, with no effect on credit score.
Could the business use another partner, or might the family help through a crisis? This is not the easiest solution, requiring valuations, negotiating with prospects, due diligence, contracts, and selling off equity to someone who will have influence over the business.
The obvious lesson is to avoid debt unless the borrowings are certain to generate a positive return. Many businesses go through tough periods but come back, that’s part of building a successful business.
Get in touch if help is needed to manage debt and cash flow.