Debt Reduction

Prioritizing Payables: Effective Debt Reduction Strategies For Business Owners

Owning a business can be stressful, especially when you feel like you are drowning in debt. Trying to manage the complications of your day-to-day operation can make it difficult to make payments or determine what methods you should use to decrease your debt. If your business is facing financial challenges or struggling with business loans, this article is here to help. Keep reading to discover:

• The strategies you can implement to improve your cash flow and reduce your business debts.
• How one small business on the verge of bankruptcy restructured its finances and recovered.
• What you should consider in order to create an effective plan for your business.

What Is The Best Way To Assess My Business’s Current Debt Situation And Determine The Most Effective Debt Reduction Strategy?

One of the best ways to review and manage a business’s debt is to look at the prioritization of payables. When evaluating your business debts, it is essential to understand where you are in the process of obtaining or repaying loans. It’s also important to remember not to panic. Debt is a common (and sometimes unavoidable) part of running a business, and there are ways to reduce your debt.

For instance, one of my clients informed me that they were on the verge of declaring bankruptcy. After examining their financials, it became clear that they had two loans that were in default status. However, they were still able to operate their business; they just needed to pivot their operations to have a little extra each month, and then negotiate a smaller payment on each of those loans.

When analyzing your business’s balance sheet to determine the priority of your payables, you should first check whether any loans are actually in default. If these debts can be negotiated, whether they are with an individual, a vendor, a bank, or another financial institution, this can make a big difference for your business.

Another factor to keep in mind is whether the debt occurred during COVID-19. Many county and state laws passed mandates during COVID-19 that incorporated an element of debt or interest forgiveness.

If you are considering bankruptcy, you should look at whether any of these factors may impact your business loans. Bankruptcy is a big step, and working with a consultant might provide you with alternative strategies so you can avoid declaring bankruptcy.

What Successful Debt Reduction Strategies Do You Advise Businesses To Implement?

As mentioned previously, one of my clients was on the verge of declaring bankruptcy. When I looked into their finances, I saw that their payment prioritization was random and chaotic. They were paying some bills and not others, and they would arbitrarily pay certain things during a month. It seemed as though they took two steps back for every step forward.

My strategy for their business involved looking at the type of loans they had, and who the loans were with. One of their business loans was with a local agency, and we were able to negotiate a lower payment amount with them. Another was a Small Business Administration (SBA) loan that allowed us to investigate an offer in compromise.

Finally, they owed money to their landlord. However, the debt on their lease was incurred during COVID-19, so we were able to look into the forgiveness edicts that were issued by the county at that time. We determined that their business owed less than what was initially documented.

Taking these actions gave the business owner the courage to move forward and gave them back some of their confidence. It allowed them to see that their business was not failing, it just needed some restructuring. They were able to use small amounts of their profits to pay a little bit each month toward their debts.

It took honesty, negotiation, and being open to feedback and suggestions, but it worked well for them in the end. If your company is struggling with debt, working with a business advisor can provide you with new ideas and strategies to solve your business challenges.

What Steps Can Businesses Take To Improve Cash Flow And Reduce Debt?

One very effective step a business can take to generate cash flow and decrease debt is making cuts. This increases your revenue because it can carve out funds to allocate toward the debts. These cuts could be on labor, cost of goods, or other overhead costs, but they essentially free up funds to be able to address those debts.

Second, it is critical to look at the severity of those debts. As a business owner, you must prioritize what needs to get paid and then leverage your terms. This will help you better manage your business debts.

How Important Is Budgeting And Financial Forecasting In Business Debt Reduction? How Can A Business Consultant Assist In Creating A Realistic Financial Plan?

It is absolutely essential to plan ahead. You have to look at the needs of your business and determine what pieces are vital for operations. Next, you should take 30-60 days and create a plan that addresses payables, as well as how to maximize your net 30s (meaning that your bill is due within 30 days).

Most vendors understand the challenges of a business, so if your bill is past due, it’s important to communicate with the vendor. When you explain your situation, vendors are often able to negotiate with you. Some payment is always better than no payment for the vendor, and they may be willing to work with you on a payment plan based on your cash flow.

Part of our process with business owners involves developing a 90-day plan to pay debts and address payables based on how their merchant deposits work. Not everybody gets paid right away, and sometimes it takes 48 to 72 hours for the funds to hit your account. With purchase orders, you may not receive payment for another 15 to 30 days, or possibly longer if it's late.

Planning ahead, reviewing when your funds will arrive, and addressing your debts systematically will greatly assist your business. In addition, having an advisor who can help you create this plan helps immensely if you are a business owner who is struggling with business debt.

How Can Business Owners Avoid Accumulating More Debt While Reducing Their Existing Debt Load?

The first step as a business owner is to consolidate your payables. For instance, you should consider limiting your vendor list. You should also keep your invoicing regular, such as every 7 to 10 days.

It’s easy as a business owner to get into habits around paying or not paying your debts. For example, some of my clients always pay their invoices immediately. While it is important to pay your invoices, it’s crucial to pay them strategically. You should increase your cash flow and leverage those terms to work on a timeline that fits your business’s needs.

As a business consultant, I help my clients create a timeline. It can take patience and analytical data, but when a client is open to solutions, we are able to generate successful strategies relatively quickly. For more information on the Role Of Debt Reduction In A Business, an initial consultation is your next best step.