Corporate debt affects companies of all sizes, whether due to lack of planning, bank loans, bad decisions when specifying amount of products to be purchased, high value of taxes, in short.
If you are a manager or owner of the business and find yourself in the midst of a financial crisis, the first step is to deal with the situation objectively with a planning to get out of the red.
In this article, we suggest some steps for dealing with corporate debt.
Understand the cause of debt
You already have late payments, need to replenish the stock, the money will not be left at the end of the month again and more bills are coming? Pay close attention to this point: You need to devote some of your time to analyzing your business methodically and then understanding what is causing this debt cycle.
Are you familiar with cash flow? Can you analyze the company’s income statement? Do you understand the value of production cost? In other words, do you really know your business numbers?
There are many reasons for corporate debt:
- There is no separation between individual and legal entity and no definition of the pro-labore of the members;
- incorrect profit margin calculation;
- lack of knowledge about the cost of production of a given product;
- misuse of inputs and mismanagement of inventory;
- lack of periodic analyzes;
- too much overtime costs;
- default due to checks and guarantees.
Therefore, to identify the reasons why money does not seem to be left over at the end of the month we need to understand about all the issues mentioned above. After all, even if your sales volume is very high, you may not be making a profit.
Believe me, your creditors also want to resolve the issue and receive the amount owed to them. Therefore, renegotiating debt, setting new maturities and agreeing new interest rates may be the best way out of debt.
Here are some tips for not rushing and increasing debt:
- prefer to pay off the higher interest accounts first;
- review company invoicing / cash flow before committing to any payment
- you need to know exactly how much you can pay per month;
- calculate the time required to repay certain debt and try to negotiate it with your lender;
- Before resorting to bank loans or credit card installments, write down the amount of interest to be paid and calculate if it is worth it.
Reduce costs and expenses and adopt strategies
Remember what we commented on the first topic? Knowing the business numbers helps in understanding the cause of business debt. From there, a broader and more careful analysis lets you know what expenses can be reduced or even eliminated.
It is noteworthy that the reduction of costs or expenses should not change the quality of the product or service offered!
So, look at possible short, medium or long term strategy solutions:
- as far as possible make cash payments for vendor discounts – if you have to buy less products for this, at least set the minimum inventory in advance;
- If the above solution is currently not feasible, buy smaller quantities and ask for longer payment terms;
- cash flow monitor frequently and calculate working capital;
- If you find credit card interest to be abusive, limit usage;
- Reduce delinquency by avoiding spun sales or receiving checks;
- always require advance payment, especially if your company specializes in providing services;
- decrease the payment deadline / installment quantity;
- Always renegotiate debt according to the cash flow projection.
Finally, corporate debt does not mean the end of your business, but you must plan accordingly to get out of the crisis, as discussed in this article. Then look for the causes of debt accumulation, renegotiate, work on reducing costs and expenses, and adopt long-term strategies. And if you want to improve business management and get rid of debt, take care of your company’s financial health with a system designed to keep up with it!