Debt can be a crippling problem for small businesses wanting to grow or just break-even during difficult times. Paying down your debt in a timely manner will help you improve the value of your business, its financial situation, and its ability to continue operating into the future.
Assess your debt situation and pay them in a timely manner
Take a detailed look at all of your debts – both current and long term. Evaluate which ones are more urgent and which can be parked until some progress is made.
The key determining factor should be the interest you’re paying on your debts. For example, those with the highest levels of interest should be paid first.
Also list your debts from smallest to largest. Maybe some of those smaller debts can be paid off quickly without much hassle to enable you to focus on the larger ones. Consider consolidating all your loans into one payment if possible. Paying down your debt in a timely manner is a good start.
Cut costs and free up cash
Try to cut any unnecessary costs and free up some cash in the process. Think about how much you spend on each of your daily expenses – is there room to cut some of those costs?
For example, building firm may shout takeaway coffees for its workers a few times a week. Maybe a cheaper way can be found to continue providing coffee, such as instant coffee on site with hot water from a thermos, rather than expensive takeaways.
Have a look at how long it’s taking your debtors to pay you. If your customers aren’t paying on time, come up with some solutions for encouraging them to pay quicker.
Early payment discounts could work well but make it clear on each customer’s invoice. Alternatively, tighten up invoice periods so there are less days for your debtors to pay before penalties. Make sure you let them know about any changes and the reasons for those changes.
Have a look at how you’re using funds to pay off your business’s debt. Do you have funds available that could be better used to reduce debt further? Perhaps you have money in a current account that isn’t being used optimally – lowering debt and hence future payable interest could be a wiser choice.
Examine your cash cycle, when payments come in and when they go out to pay your creditors. Where does the incoming cash go before it gets allocated? Is there any you can reassign to debt payments?
Sell your assets
Another option for freeing up funds to reduce your business’s debt might be to sell some assets. What do you have money tied up in, but don’t use often enough to justify?
Any equipment that’s not being used could be sold off. One example could be a builder who has an oversupply of power tools – making a detailed list of all their tools and how frequently they’re used might reveal some surplus assets.
Make sure you’ve calculated depreciation correctly
Have you depreciated all the assets in your business that need to be depreciated? It’s important to get these figures correct including the ratio of personal to business use, if you use an asset for both.
For example, a company vehicle will need to be accurately depreciated in relation to its usage over time. We can help you ensure the correct depreciation is being calculated in your Xero file.