When you’re in debt, the last thing on your mind is likely how to get out of it. More often than not, it takes a crisis to force us into action and become aware of our current financial situation. For businesses, this means taking stock of your company’s finances. You may have already started preparing for those rainy days by establishing a rainy day fund or savings account with cash reserves to protect yourself from sudden dips in income. However, even if you have a financial safety net in place, things can still go south fast. Financial difficulties are a common problem among small businesses. In fact, 80% of all bankruptcies are due to financial stressors such as fluctuating expenses, limited credit availability and volatile cash flow cycles. Once you realize that things aren’t going according to plan, you can always seek the help of a professional debt advice company; but there are steps you can take now to get back on track before it’s too late:
Know your numbers
In order to understand your company’s current financial situation, you need to know the numbers. You can start by reviewing your company’s balance sheet to see your current financial assets and liabilities. Your balance sheet shows the financial position of your business at a specific point in time. It lists your assets, liabilities and equity for quick reference, and helps to provide a snapshot of the company’s financial health at a given moment, as well as its ability to meet short-term financial obligations. You should also conduct a cash flow analysis that shows all inflows and outflows for a specific period of time. Keep in mind that all cash flow statements are prepared on a monthly basis. You should also factor in your company’s payment terms and average collection period. This way, you can identify where you are currently spending too much and which customers are taking too long to pay.
Refine your business model
If your company has increased overheads but you aren’t able to increase your sales, you may want to consider refining your business model. This means taking a critical look at the costs and revenue streams of your company and determining where you can cut back. Keep in mind that you don’t want to cut back on the essential functions of your business. You just want to find ways to do them more efficiently. You can also determine if there are any opportunities to diversify your business model and explore new revenue streams. There are many examples of small businesses growing and thriving by tapping into new streams of revenue. One of the most famous examples is The Honest Company. In 2000, Jessica Alba and her then-boyfriend started a natural baby-product company that focused on ecologically and ethically sourced products. By 2008, the business had grown significantly and was generating $25 million in annual revenue.
Assess debt liabilities
Figure out how much debt you are currently in and which creditors are knocking at your door. You can start by pulling your credit report, which will show all outstanding debts, payment history and credit scores. You can also pull your company’s credit report, which will reveal any outstanding debts. Using software or an online service, you can also crunch the numbers and calculate the different debt ratios for your company. Debt to equity ratio is one of the most important ratios that lenders use to assess if your company has enough equity to repay its debts. You can use your balance sheet to calculate this ratio. Your debt to equity ratio indicates the degree to which your company is leveraged. The closer your debt to equity ratio is to 1, the more risky it is for lenders to extend you credit. The more debt you have, the less cash you will have available to cover your other expenses, such as payroll, rent and marketing and advertising.
Lay out a repayment plan
Now is the time to sit down with your employees and discuss a repayment plan with your creditors. You can negotiate lower interest rates and longer payment terms with your creditors. You may also want to consider negotiating a payment holiday with your landlords if you are finding it difficult to make monthly rent payments. You can also consider putting your assets up for collateral. You may want to explore getting a short-term loan from a private lender. You can use this money to pay off your other debts and get your company back on track. Be aware that when taking out a short-term loan, you may have to pay a higher interest rate than you would on a line of credit or credit card.
Take immediate action by selling off assets
If you have exhausted all other options and you still don’t see a way out of your financial woes, you may want to consider selling off some of your company assets. This can help you reduce debt and generate enough cash to cover your other expenses. You can start by reviewing your company’s fixed assets and other assets that can be sold. You can also consider selling equity in your company to an investor or offering a convertible note. Finally, you can take on a new partner who wants to inject capital into your company in exchange for shares. Be aware that this is a long-term solution. You can’t just sell off assets and cut costs to get out of debt. You have to put in the work to ensure your company is profitable again.
Being in debt isn’t always a bad thing. It can be beneficial if it’s used to grow your company and make investments that will allow your company to thrive. However, if you’re in debt and your company isn’t growing, it can be extremely difficult to get out of debt and dig yourself out of the hole. As a business owner, it’s essential that you keep your financial health in mind at all times. This will help you identify potential issues before they become serious problems. You should be keeping track of your company’s cash flow and expenses at all times. If you notice any irregularities, it’s best to address the issue as soon as possible.