So you are an owner of an SME, and you are thinking of taking a loan to grow your business. The right loan at the right time can be beneficial for a small company to build on its earlier success. But as a business owner, you need to know how to manage debt well.
Being unable to repay your debts on time can hinder your ability to run the business. You may find your time taken up by calls with creditors and dealing with broader damage to your business’ image. This time could be better spent building your client base and executing on your business strategy.
A common issue we find is that business owners focus too much on profitability and not enough in managing their cashflow. A business may well be profitable but may not generate sufficient cash flow to meet its operational needs, including paying creditors such as lenders and suppliers.
How could this happen?
There could be several reasons. Frequently, this may be due to poor management of accounts receivables where a business’ trade debtors do not pay them or pay them well after the due date. The company may have profitable contracts, but due to delays in payment from their clients, may find themselves in a cash crunch and unable to make timely repayments on their debts.
What can you do?
Always manage your accounts receivables actively and have a process to follow up on trade debtors who are late in their repayment.
You should review all your sales contracts to determine what actions your company can take if a trade debtor does not make payments on time. This may include withholding further service or products until late payments are received.
You can also review your payment terms to the suppliers and try to negotiate payment terms that better match your company’s actual cash inflows. Non-critical capital expenditures should also be examined to decide if they can be deferred or eliminated.
If a business is currently repaying shareholder loans, these should be deferred.
Debt with higher interest rates should be prioritised for repayment first.
Finally, if a cash flow shortfall is projected to persist after all corrective actions taken, you may want to consider approaching your creditors with a restructuring plan.