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Debt management tips

Manage your business debt



Running your own business is challenging at the best of times – in a slower economy it’s even tougher. “Economic downturns and debt management challenges go hand in hand,” agrees Chartered Accountant Bruce Bailey of BAB Consultants of Sharon, Ontario. “But a tougher economy can be a benefit if it forces a business to analyze the core competencies that drive its success and the business owners are willing to make choices that are often difficult, but will improve the business over the long run.”

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Over more than 25 years as a CFO in a variety of industries, Bailey has helped many businesses manage their debt in a slow economy to better position themselves when the economy picks up. That’s because, in tougher times, these businesses turned themselves into nimble, focused organizations that protect their balance sheet. Here are some of Bailey’s debt management tips: Keep your eye on your banking covenants and your lenders in the loop - Small businesses usually need to borrow to finance their operations and drive further growth. Management teams focused on running the business, especially when they’re stretched to capacity, can easily lose sight of the requirements lenders have attached to their loans. If lenders find out the business has breached its lending covenants – for example, profitability levels or debt ratios get out of line – they can, and often will, demand immediate repayment of their loans. Make sure to keep your lenders informed of your business activities. Review the financing the business has in place and how it is being used - Accurate, up-to-date cash flow reports are essential for knowing how the company is using its debt financing. How much goes to purchasing inventory, financing receivables, acquiring equipment and technology, or something else? Expenditures in each area will have different ramifications for your lenders and their financial covenants and margin tests. Differentiate between business “needs” and “wants” - Spending on things required to maintain the business’s operations are essential purchases. Capital expenditures, on the other hand, often are not. Capital expenditure should be supported by a detailed capital budget that considers the effect on cash flow, banking covenants and how financing for the expenditure will be arranged. Since most businesses face a variety of factors that influence their capital expenditures, it is important to keep tightly focused on your capital budget. Understand your cost drivers and performance indicators - Through activity based costing, it is possible to develop a detailed picture of the factors that drive the costs behind each activity. By analyzing customer profitability, for example, you can determine which customers are less profitable to your organization than others, allowing you to approach them on your terms and conditions. When you understand these business metrics – and keep them readily available – you and your organization’s decision makers will have the information needed to keep their “fingers on the business’s pulse.” Think proactively when it comes to financing – The best time to ask for financing is when you don’t need it. It’s the ideal time to arrange lease financing facilities, establish operating lines of credit and even secure term debt facilities. Shareholders may even have cash they could reinvest in the business. All of these sources of cash come with different capital costs, and will affect any decisions regarding additional financing today and in the future. Remember, times will change – Today, the cost of debt is relatively low – but that won’t last. When the economy strengthens, debt costs will inevitably increase. Plan for that now by building a strong balance sheet and prepare to take advantage of new opportunities when they arise. Manage the business basics – While often a challenge to do so effectively, it’s always worthwhile to manage the business basics but especially when debt is a major concern.
  • Invoice as soon as goods or services are delivered – Make sure your invoices are complete and accurate and consistent with your customers’ expectations. Be sure to follow up on high value invoices so payments don’t lag.
  • Manage trade payables – Take advantage of all discounts available to you and be sure the terms of sales you receive are consistent with those offered to your client. While you don’t want to delay your payments to the point of risking future business with a supplier, you should manage your payables to ease cash flow crunches as much as possible.
  • Integrate your business information system with your customers – When your systems and documentation are integrated with your customers’ it helps reduce delays, especially when key documents, such as orders and invoices, have been identified and reconciled in advance.
  • Manage inventory turns – Turning inventory into cash saves organizations more than just the net realizable value of the inventory. There are often many other efficiencies that can be realized when inventory turns increase.
Brought to you by The Institute of Chartered Accountants of Ontario


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Inst. of Chartered Accountants -- Bio and Archives

The Institute of Chartered Accountants of Ontario is the qualifying and regulatory body of Ontario’s 33,000 Chartered Accountants and 5,000 CA students. Since 1879, the Institute has protected the public interest through the CA profession’s high standards of qualification and the enforcement of its rules of professional conduct. The Institute works in partnership with the other provincial Institutes of Chartered Accountants and the Canadian Institute of Chartered Accountants to provide national standards and programs that are used as examples around the world. </em>


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