13. I’m worried about debt and financing.
16 things keeping SME owners awake.
If there’s one thing that would make business life so much more relaxing, it would be knowing that you have secure credit and will always be able to cover your debts. Unfortunately the only entities that can even come close to this state of security are businesses who have a monopoly in a field that is mission critical to a society, or a nation state that has a Balance Sheet that allows any amount of borrowing to cover deficits. I’m assuming you aren’t in either of these positions, so have a think about some of these things.
It’s cliché time again. You can’t know what you need next until you know where you are right now. Take a good hard look at your current position. That means getting not just acquainted, but intimate with your P&L, Balance Sheet and Cash Flow. If the secret of a solid personal relationship with another human being is by being brave enough to ask them how they feel about you, how you’ve been performing as a partner and what they need for a happy and harmonious future, your financial statements are the proxy for this in your business.
Doing budgets can be mind-numbingly dull and generally only accounting types are into it. But the reality is, a well constructed budget can give you real peace of mind because you are able to measure your performance against something other than how you “feel”.
Make an absolute priority of paying down debt. Start with the most interest heavy debt. If you can pay down a lot, do so. If you can only pay down a bit, do that. The principle is that you get in the habit of clearing debt regularly. My recommendation is that you do this with two questions in mind. The first is – am I going to run the business short of working capital if I pay this back now? If the answer is yes, make the repayments more modest so you don’t jeopardise the business. The other question is – if I pay this amount of debt back and the situation becomes even more challenging, will I be able to borrow some of it back? Let these guide you to a position of balancing cash flow with debt reduction.
If you’re in a position of having multiple debts to different places for different things, consider going to your most trusted and favoured lender and discuss a consolidation loan that will allow you to simplify your debt profile with a solid partner who will be more inclined to work with you to find the best way forward.
As discussed earlier, your first line of credit is your suppliers. Don’t wait until there is a serious problem and you default on payments without warning. Have frank conversations with your key suppliers about extending trading terms for a specific period to help you through a situation. I promise you they will look far more kindly on being asked to help than being forced to against their will by you just not paying.
If you’re in a position to (or need to) take on additional debt, understand very clearly what the money is going to and what it’s for. If it isn’t going to help deliver greater revenue and profitability it may not actually be what you need at all. That sounds more like just trying to stave off a bad outcome for a little longer.
There is no more critical time to focus like a laser on cash flow than right now. It’s always enlightening to see how a business’s P&L and it’s cash flow can be very different. Highly profitable businesses can go through really tight times with cash because of the offset between when you have to pay your bills and when your customers pay theirs. Getting these things better aligned will do wonders for your cash position.
Have I said this before? Be positive and upbeat with your people. It matters more than you can possibly imagine.
If at any stage you would like to reach out and talk in more detail about any or all these issues, or even ones that aren’t mentioned, please call me on +64 275 665 682, email me at john.luxton@regenerationhq.co.nz or book a time to talk, either face to face or by Zoom. Any call will be free, confidential and with no obligation to do anything else.