Saturday, February 18, 2012

Managing Business Debt - 6 Tips to Keep Your Business In The Black

There has been a great financial shake-up of sorts that has taken shape over the past 5 years, around the world. Those who were only concerned with growing their businesses suddenly started becoming aware of debts incurred along the way and found themselves wondering how to curb them, and there are tried and true manners or practices that assist in the process of reducing the amount of debt held by a company.

Business debt is for the most part something that all businesses have, as companies and proprietors are generally not cash-rich and therefore need to borrow in order for the business to grow. The problems begin when the amount of debt continues to build and becomes excessive.

At this point, there is a good possibility that the company is either losing profit or on the verge of becoming non profitable and the owner needs to begin to make some major decisions on how to tackle the situation.

Here are six basic business practices that are widely known that a company can do at this point:

1) Reduce Costs
2) Increase Income
3) Restructure Liabilities
4) Restructure Assets
5) Raise Further Capital
6) Exit the Business

Asking a business owner to reduce costs is generally, as the saying goes... easier said than done. The company can look for a big savings, like eliminating a high cost - low return portion of the business or an across-the-board savings, where the company would cut costs by a determined percentage on all expenses. These decisions are not made lightly but are nevertheless a step in reducing business debt.

There are three basic ways to for a business to increase income and those include: 1) increasing sales, 2) raising the price of the products sold, and 3) seeking alternative streams. Increasing sales is certainly something that all businesses seek to achieve but the difficultly lies in determining those particular actions that will be successful. For instance, a company may decide to offer special programs or discounts to referral customers or those who make advanced purchases. Also, some may look into the idea of adjusting the marketing aspects being used and make the necessary adjustments. Or, a company could just raise prices. This can be and generally is a very delicate thing and can backfire should the increase be out of the realm that consumers are willing to pay. Lastly, a business may decide to look to alternatives such as: selling advertising with the physical location or website, renting any available space, or selling any unused products.

By definition, the liability a company has is the combination of what is owed to others and generally in the form of cash or money. The particular part of restructuring liabilities is the word 'restructure' as this process does not necessarily reducing the overall amount indebted but rearranging the terms of the liabilities that can lead to increased cash on hand. Some of those techniques would include:

- Negotiate payment terms with exiting suppliers
- Refinance present loans to secure lower interest rates or even consolidate all loans
- An additional option that may require assistance from an accountant is to defer certain tax liabilities should such be an option

Most of if not all the above options are those that one cannot control exclusively as another party needs to be involved and be willing to accept any renegotiation that takes place. By that same token, some may not make sense at a certain time depending on the current financial climate. For instance, if your present interest rate is lower than what is being offered in the market, it would most likely not be beneficial to the company to do this. As always, any company should take the time to perform the necessary due diligences before embarking on any reduction techniques.

There is also the possibility of restructuring the assets portion of a balance sheet. For a novice reader's knowledge, the assets of a company are those objects currently owned. A few of the different restructuring techniques for the assets include:

- Utilizing current investments or even cash to pay down or off outstanding loans
- A lease back option - Meaning selling an asset to a finance company and lease such back
- Factor the invoices - The object here is to reduce the asset value of the invoice but raise cash

Or, a company can decide to sell off any surplus or old equipment and even in some certain situations sell current assets.

Raising capital is most likely not a new idea for many business owners as in most cases the current business operations began by either borrowing funds from venture capitalists or even family members. Therefore, this is generally the starting point to raising the needed capital to continue operations. The company could and would most likely need to issue more shares to accommodate the increase in capital by current investors. An alternative would be to go outside the current investors and locate new persons or companies who would be willing to join the present investment group or perform a buyout of the current investors. Either way, most likely an appropriate portion of ownership will need to be yielded.

Also, and depending on the type of business one is in, the possibility exists of researching and obtaining grants from local or federal governments to increase the capital supply. Depending on the steps taken and how the additional funding is executed, the ownership structure prior to the funding need will change and as will the pressure to be successful with the additional investment.

Finally, the last method in dealing with excess debt is to actually exist the business altogether. Certainly this path to reducing one's debt is the least desirable but under certain circumstances it is inevitable. Luckily there are some options. The most common would be to sell off all the business assets - including any goodwill or client list - that can be utilized to pay down or off the business liabilities. Secondly, there is the possibility of selling the business as it currently stands - a going concern - whereby another group would purchase the company most likely out right and remove the owner. Third, there is a technique that can be quite effective but also extremely damaging to any business endeavour, and that is going into receivership (or as is more commonly known, corporate bankruptcy).

Debt is part and parcel of running a business, but it should not become an unmanageable burden.

Gilles Herard, Jr is a seasoned Merchant Banker and has been in the banking industry for nearly 40 years. He worked early in his career at the Toronto Dominion Bank (Canada) and later on joined Manufacturer Hanover (MH) of New York as Senior Credit Analyst. He eventually created his own Firm, Capital Corp Merchant Banking, where he syndicates and structures funding for top companies worldwide, all the while investing his own firm's funds into the projects.

As the head of Capital Corp Merchant Banking, Mr Herard has become a leading figure in international middle-market project financing and engineers all funding structures for projects at Capital Corp. Mr Herard has received numerous awards for his work and other contributions.

No comments:

Post a Comment