Debt Management - A Holistic Approach

Debt Management - A Holistic Approach

Ashutosh Sharma, CFO, FutureSoft Solutions

Risk is an integral part of any business. Apparently you can't really plan for recession, natural disasters or other negative impacts as if you take a too-cautious approach then you aren't bound to succeed. But sometimes the odds will go against you. If you find yourself unexpectedly further in debt than you'd like, don't panic as there are options and routes available to sail across, but you need to act swift, as if you sit back passively and wait for the worst to happen, it just might.

So debt management becomes imperative before becoming unmanageable. A debt management plan becomes very useful when the amount of money being spent for debts starts taking up a lion's share of the income or surpasses it.

Understand Your Situation & Take Action
If you're facing increasing debt, take action in-stead of hoping for the best. If you fail to make payments on your debts, the consequences are often disastrous. They can include loss of employees, seizure of stock and costly court cases brought by your creditors. Potentially worst than that is the risk of government intervention. So stay sharp and aware of your situation. Use good software to keep a close eye on your outstanding debt and monthly payments. This dashboard should be at your fingertips at all times.

After that, your priorities will depend on the type of business you run and how flexible your suppliers are willing to be. The following payment priorities are suggestions, but the actual order on criticality order is for you to decide:
Salaries: If you don't pay your employees' wages on time, you may lose mind share and then loose the employee bringing a new in-vestment of on boarding training and other costs involved in nurturing talent.
Vendor Payments: Avoid losing your trust and capability of doing business, while losing your partners.
Payables: If you don't pay, your credit score will be impacted, which will affect your ability to borrow money in the future. Also, there are provisions in GST which disallows input credits on exceeding 180 days and attracts interest and penalties thereafter.
Bills: Outgoing costs such as rent and utility bills need to be paid to keep the wheel spinning.

Secured Debts
Insurance: Especially where the professional indemnity and public liability cover and your work involve that as a clause to service agreement.
Credit Cards: Avoid penalties or interest charges, as these can pile up quickly and the risk running to lower your CIBIL score.

Here are few suggestions to more intelligently manage your debt:
• Negotiate better interest rates with your bankers/lenders.
• Negotiate better amortization schedules. The longer you pay off your loan over the lower your payment will be.
If the loan amortizes over five years, your payment will be lower than if it pays off over three years; ten years is even better.
You can always pay extra principal; the key is to minimize your required payment to guard your cash flow if you have a short-term down turn.
• Negotiate better payment terms. If you need to protect your cash flow, see if you can have your interest and principal accrue. Or if you can have interest only payments due. If protecting cash flow is a key goal, then making your minimum payment as low as possible gives your business the maximum flexibility to protect its cash flow. You can always turn an interest only payment into an amortizing one by paying down additional principal.
• Work to remove personal guarantees. If you can't get the loan with-out the guarantee, at least limit the scope of the guarantee to be as narrow as you can manage. If you're • Work to remove personal guarantees. If you can't get the loan with-out the guarantee, at least limit the scope of the guarantee to be as narrow as you can manage. If you're married, keep your spouse off the guarantee.
• Bankers hate surprises, so keep them in the loop and minimize any potential to surprise them. Break any bad news to them slowly and early.
• Discuss more favorable payment terms.
• Talk to all your creditors. Explain the situation and make it clear you have a comprehensive plan for re-solving it. Stay positive - tell them you want to pay in full but need to renegotiate terms for that to happen. They should understand that it's in their interest to accommodate your request. After all, if your business fails they'll get nothing back.
• Be proactive here. If you approach your creditors before they start chasing you for missed payments, they're more likely to take you seriously and agree to your terms.
• Increase your revenue.
• Easier said than done, of course, but there are ways you can boost short-term revenue. By taking action, you could reduce your debt payments enough to get you back on track.
• Offer your customers mark-downs or reduced prices on advance payments.
• Discounts for fast payment can help better cash flow. Think about where you can cut costs. Use technology to list your largest outgoings and see where you can make reductions.

For example:
1. Reduce the amount of space you rent or lease, especially if you're not using it all.
2. Can you combine your business loans into one payment that will reduce monthly costs and not adversely affect your credit score? Talk to debt consolidation companies about this, but read the small print carefully.
3. Consider refinancing, if your credit record will allow it.
4. Negotiate with suppliers. Don't be shy about asking for discounts, especially if you buy in bulk or place regular large orders and have a good payment history.

Be intelligent about where you cut costs. You might feel like you need to cut costs to the bone when debt looms over you, but sometimes it can be counter-productive. For ex-ample, consider the global economy. Some countries chose 'austerity' because of excessive debt - yet they suffered with more sluggish economies than those who tried government stimulus exercises (at least in the short term).

Many entrepreneurs fail in business at least once before finding a successful strategy. And as long as you learn from the experience, you may be able to bounce back stronger next time.