Most companies have some business debt. The ease with which they manage it is driven by the type of debt and why they have it. Revolving credit debt is used most often in situations where the company is dealing with cash flow insolvency.
A company will be at risk to the degree it is relying on credit for its survival. When you use a line of credit or a credit card, the risk is that you will have enough money, at a future date and time, to pay back the financial obligation when it is due. You are actually pledging your future business production to the credit company, and you will no doubt need the cash flow from that future production to pay future bills.
You cannot borrow your way to cash flow solvency. The solution to managing business debt is to handle the lack of cash flow to run the company and purchase what it needs without relying on credit. Here are some tips you can use to create cash flow solvency.
Know Your Real Income Planning Target
Too many business owners under-estimate how much cash flow they need to bring in each week, or month, in order to do much better than breaking even. The simple reason for this is that they only use their accounting financial reports to try to figure out how much income the company needs to make to show a profit. Yet when they do show a profit, and have to pay taxes on it, they wonder why that profit is not sitting in their bank account. When it comes to cash flow, predicting the future requires planning for the future.
The simple calculation of how much your financials show it cost to run the company, plus the debt from the balance sheet, plus how much cash will be needed for handling future financial emergencies, paying taxes, funding business expansion, handling legal matters, salvaging the company in the case of a big downturn in the economy, and stashing cash to fund a retirement plan, typically reveals that the income planning target to do better than breaking even is a much larger number than estimated. This activity is known as building a cash flow budget.
Set Sales Targets and Quotas For Your Staff
If your income planning target is too low, then you are planning to go broke. If your income planning target is correct then you have a solid number to use to set the sales targets and quotas for your employees. If everyone, including the administrative staff that supports the sales staff, know the real target the company has to make, then they’ll work toward that target. When they don’t know what is actually expected of them, it can only hurt the business.
Pay Bonuses Instead Of Giving Raises
It is dangerous in the extreme for a company to get into the position of being expected to hand out pay raises every year. The business owner ends up paying more each year for the same performance, or sometimes less performance. Instead of giving raises every year, implement a bonus system based on exceeding the income planning target. You can pay bonuses out as a share of the profits over the target. Just as an example to start your thought process on this one, your bonus plan could pay smaller monthly or quarterly bonuses to keep staff excited and “in the game” and then a large bonus at the end of the year.
Find Ways to Cut Your Expenses
A requirement of plan to manage business debt is more cash flow as fast as possible to pay the debt off.
Examine where your business’ income is going and reduce all unnecessary expenses that do not contribute to making more money. Before you spend, work out how much money each and every purchase is going to return to your company.
TIP: Never stop promoting your company and its products to current customers and prospects – this is one area you don’t want to stop spending on. Just make sure you are getting a healthy return on the promotional investment.
Raise Your Prices
Increasing cash flow solvency requires keeping up with the annual increases in the cost of doing business. When your suppliers raise the prices they charge you, then you need to pass those increases on to your customers.
Tip: Raising your prices in small increments more frequently is less shocking to your regular customers than one huge increase once a year.
Allocate Your Cash Flow to YOUR Best Financial Advantage
Allocate some of your money toward paying past-due bills, debt, current bills, future large expenses that are difficult to pay when they come due, and the things you will need for handling emergencies, paying taxes, expanding your business and, most importantly, saving for your retirement.
Business owners whose companies consistently are running well in the black share the trait of having discipline when it comes to cash flow management. Careful, consistent cash flow management can increase cash flow solvency and speed up managing business debt.