Our recent Business Sentiment Survey showed us that effective debt management remains essential for small businesses to maintain financial stability and support growth in New Zealand. Here are our top ten tips to manage debt effectively:
1. Understand Your Debt Situation
- Create a Debt Inventory: List all outstanding debts, including creditors, balances, interest rates, and payment terms.
- Assess Debt-to-Income Ratio: Calculate how much of your revenue goes toward debt servicing. High ratios often indicate financial strain.
2. Prioritise Debts
- Focus on High-Interest Debt First: Pay off debts with the highest interest rates to save money over time (e.g., credit card debt).
- Maintain Essential Credit Lines: Prioritise payments for debts critical to your business operations, like supplier accounts or equipment leases.
3. Refinance or Consolidate Debt
- Negotiate with Lenders: Talk to your bank sooner rather than later. Request lower interest rates, extended repayment terms, or alternative payment schedules.
- Consider Consolidation: Combine multiple debts into a single loan with a lower overall interest rate to simplify management.
4. Improve Cash Flow
- Optimise Accounts Receivable: Offer early payment discounts or tighten collection processes to get paid faster.
- Cut Unnecessary Expenses: Review your budget to eliminate non-essential costs and redirect savings toward debt repayment.
- Increase Revenue Streams: Explore ways to boost income, such as launching new products, raising prices, or expanding your market.
5. Create a Debt Repayment Plan
- Use the Snowball Method: Pay off the smallest debt first while making minimum payments on others, then roll those payments into the next smallest debt.
- Try the Avalanche Method: Prioritise debts with the highest interest rates to minimise overall interest paid.
6. Avoid Over-Borrowing
- Plan Ahead: Forecast future cash needs to avoid taking on unnecessary or expensive debt.
- Use Debt Strategically: Borrow only for investments that generate returns, such as purchasing equipment or expanding operations.
7. Build an Emergency Fund
- Set aside a portion of profits to create a financial buffer. This reduces reliance on debt during unexpected downturns or emergencies. While this can be difficult to establish in difficult times, the long term benefits can be significant.
8. Strengthen Relationships with Creditors
- Communicate Proactively: Inform lenders of any financial difficulties before missing payments to negotiate better terms.
- Build Trust: Regular, timely payments improve your credibility and may open doors to favourable refinancing options.
9. Monitor Financial Health Regularly
- Use Accounting Software: Tools like MYOB or Xero can help track debt payments and financial performance.
- Analyse Metrics: Keep an eye on key indicators such as liquidity ratios, debt-to-equity ratios, and cash flow.
10. Seek Professional Help
- Consult Financial Advisors: Work with your accountant and business advisor to develop and implement a tailored debt management strategy.
By taking a disciplined and proactive approach, small businesses can effectively manage debt, minimize financial risks, and position themselves for long-term success. If you are experiencing debt management issues, then act on them. Don’t wait for them to resolve themselves. They probably won’t! If you would like more advice on this topic, contact your local Advantage Business Advisor.