Businesses often borrow for perfectly valid reasons. In the beginning a small business may need funds to purchase equipment or inventory. Other necessary debt may be incurred to expand operations.
Step One: Review the state of your current finances.
This first step to getting out of business debt should be easy as long as you understand and follow a few simple accounting steps. If you keep good records, your small business debts will be much easier to overcome. Plus, you’ll have less work to do during tax season and subsequently a better tax situation. You don’t need to be a financial expert, but you will want to manage cash flow of your business in order to have the extra cash needed to pay down the debt.
A basic understanding of your finances will include the following actions:
Budgeting – Setting a budget and sticking to it is extremely important. Sometimes your expenses will go over budget and you will need to make adjustments, but planning ahead will help reduce the overall impact of unforeseen circumstances.
Understand your Financial Statements – Regular analysis of your financial statements is the only way to make informed decisions based on the financial health of your business and the goals you have set. This document gives you a one-time overview of your company’s income and expenses. EVA Business Solutions can provide you with management reporting to help you not only review where you currently are but keep an eye on your progress.
Identifying your Current Assets and Liabilities – The most obvious action to help manage current debt is to list your assets and liabilities. Assets refer to things you can use to pay down debt, such as accounts receivable, and debt is anything you owe someone else, whether it’s a loan, line of credit, credit card or accounts payable.
Step Two: Create a repayment plan for each debt.
The next step is to begin paying down debt one bite at a time, but know that it may take a little patience. Create a plan that is easy to follow and makes sense based on the cash flow you have available. You may be tempted to set high goals to pay off your business debts as quickly as possible, but just know that success takes time.
Here are some tips to use in your debt repayment plan:
Pay high-interest debts first – Identify the debt with the highest interest rate and plan to pay it off first. The less you have to pay the lender above and beyond what you originally borrowed the better.
Negotiate with lenders – Contact your lenders and ask if you can adjust your interest rates or payment schedules. It’s worth negotiating your debt to reduce your debt or create a more favorable payment plan.
Designate cash to be used specifically for this purpose – when one debt is paid, use the cash you would have allocated for that debt and add it to payments to help pay off the next debt in your repayment plan.
Step Three: Reduce unnecessary business expenses.
When you are a small business, you are in control of your business expenses and can cut costs when needed. If you’re ready to allocate funds towards your debt repayment plan, it’s time to decide where to cut back and save money for this purpose.
Consider these cost cutting tips:
Eliminate unnecessary expenses – Some expenses are not necessary for your business. Look at your expenses and categorize everything into essential and non-essential business expenditures. Some expenses will be essential, such as payroll, bookkeeping, software, insurance, business taxes, and cost of goods. Additional expenses such as advertising, meals, charitable contributions, or travel to events can be good business opportunities, but you can do without them when cash is needed to pay down debt.
Choose vendors and subcontractors wisely – If you are happy with your current vendors and have a good working relationship, negotiate for a better rate. Alternatively, consider shopping for a cheaper provider that offers similar products or services.
Step Four: Increase your revenue and subsequent incoming cash flow.
Small business owners are in business to make money and be profitable. Businesses with debt may have a less time to increase their income, so here are some ideas that can help improve your cash flow:
Attract new customers or sign up new clients – Bring in new customers through free marketing efforts such as word of mouth which can be a powerful tool, so encourage your existing customers to refer your services or products.
Expand your existing product or service – Depending on your business, a new product or service can be a valuable way to increase sales. But remember, the idea is to reduce your small business expenses, so don’t take out another loan to expand your product or service offering.
Step Five: Contact EVA Business Solutions to help you with steps 1-4.