For entrepreneurs in Droitwich and beyond, managing business debt is essential for maintaining financial stability and enabling future growth. Whether for expansion, purchasing equipment, or navigating unexpected expenses, debt can be useful if managed well. However, if left unchecked, it can spiral into a serious financial burden. Here, JRMA provides some practical steps to help business owners understand and manage their debt to safeguard their financial future.
In the first instance, it is essential to get a clear understanding of what you owe. Start by producing a comprehensive breakdown of all your outstanding debts, including loans, credit with suppliers, credit card balances, and any other liabilities. Note each debt's balance, interest rate, and monthly repayment amount.
With a complete overview, you'll be better positioned to prioritise payments and make informed decisions about allocating your resources.
When managing business debt, it's essential to establish a payment hierarchy. Focus on debts with the highest interest rates first, as these cost your business the most in the long term. High-interest debt can grow quickly, leading to escalating monthly payments and limiting available cashflow. Paying these obligations first can reduce the amount you pay in interest over time.
Alternatively, if certain debts are causing immediate cashflow challenges, you might focus on repaying those to improve liquidity. Always consider your unique financial situation and business goals when prioritising payments.
If your business is struggling to meet debt obligations, don't hesitate to contact your creditors. Many lenders are open to renegotiating terms to prevent you from defaulting. This might include extending the loan term, lowering the interest rate, or adjusting the monthly repayment amount.
However, preparation is key. Before approaching lenders, ensure you clearly understand your current financial situation and have a realistic proposal for repayment. Showing your creditors that you are taking a proactive approach to repaying your debt can increase your chances of negotiating favourable terms.
Setting up a payment plan with HMRC may be possible if you cannot pay your tax bill on time. This payment plan is also known as a 'time to pay arrangement. HMRC will consider creating a payment plan if you owe tax from Self Assessment, employers' PAYE contributions or VAT. If your company owes HMRC tax, they will propose ways in which you should aim to reduce your tax bill as soon as possible.
Further details of HMRC's tax payment plan can be found here.
Debt consolidation is a strategy where you combine all of your debts into a single loan, ideally with a reduced rate of interest. This can make managing business debt more manageable by reducing the number of payments you need to keep track of and potentially lowering your monthly payments.
While consolidation can be a helpful tool, it is essential to review the terms carefully and ensure the new loan is favourable. However, only some consolidation options will save money in the long run, and some could even extend your debt period or increase total interest payments.
Cashflow management is essential to managing business debt. Develop a detailed cashflow forecast that includes all revenue, expenses, and debt payments. This will help you anticipate potential shortfalls and make adjustments before they become problematic.
Keep a close eye on factors that can impact your cashflow, such as seasonal variations in sales, late client payments, or unexpected expenses. Understanding your cash flow trends enables you to set aside funds for debt payments and avoid taking on unnecessary debt.
For more information about managing cash flow, please read our blog, What is a cashflow forecast and how can bookkeeping help?
Monthly management accounts are essential for keeping track of your business's financial health, including debt. These accounts provide regular snapshots of your business's revenue, expenses, and overall financial position, allowing you to see the impact of debt payments on cashflow and profitability.
Reviewing management accounts each month lets you quickly identify whether your debt level is becoming problematic or if you're on track with repayments. This ongoing insight allows you to make timely adjustments to your budget and spending plans and helps you avoid falling behind on payments.
JRMA specialises in preparing management accounts. By producing monthly management accounts for your business, we provide a more detailed analysis of how well your business is performing. In doing so, you make data-driven decisions and maintain a clear view of your financial situation.
Once you have a handle on your debt and cashflow, develop a structured plan to reduce your debt over time. Set realistic goals, such as reducing debt by a specific amount each month or focusing on eliminating one debt at a time. Make sure your debt reduction plan is feasible based on your current cashflow, and adjust it as needed to keep up with changing financial circumstances.
Having a clear plan helps you stay focused and motivated, giving you a sense of accomplishment as you see your debt levels decrease.
While taking on new debt can sometimes be necessary, avoid borrowing more unless it's part of a clear, profitable business strategy. Assess whether the new debt is absolutely essential and ensure it won't compromise your existing debt management plan.
If you're considering new debt, evaluate how it will impact your monthly cashflow and whether it aligns with your long-term financial goals. Careful planning and financial analysis will help you avoid falling into a cycle of recurring debt.
Managing business debt is about balance, i.e. strategically using debt to fuel growth while keeping repayments within your financial capacity. You can maintain control over your debt and secure your business's financial health by staying organised, prioritising high-interest debts, monitoring cashflow, and leveraging monthly management accounts.
JRMA understands that managing business debt can be daunting for many business owners, but we are here to help. If you would like to discuss solutions for managing your debt, including having up to date books and financial records or producing monthly management accounts, please contact us at 01905 796512 or email info@jrma.co.ukto arrange a free consultation.
