Bad debt can cripple a small business and seriously impact your cash flow. We regularly see business that find themselves in financial strife without a clear vision of how to get themselves out the predicament they’ve found themselves in.
They take on more work and grow the top line and then still can’t figure out why they’re getting into more and more debt.
So we’ve decided to share with you our strategies for getting your business out of debt and putting money back in your pocket. Before we get into the three big ones, let’s have a look at some overall strategies:
1. Make a Profit!
Sometimes easier said than done, but making a profit is the easiest way to reduce you business debt. Assuming your profits aren’t being used to fund other debt repayments (like hire purchase repayments, business loans, etc) then putting money on the bottom line will go a long way towards making repayments of your outstanding debts.
2. Put Yourself on a Wage
It’s so easy to take out of your business more than what you should if you have access to all available funds. Put yourself on a market salary and learn to live off that and only that for personal expenses.
3. Reduce your Debtors
Getting paid on time will reduce the working capital required in your business and help free up cash that can be used to pay down debt.
Common Types of Small Business Debt
The following are the three most common types of small business debt we see in small business, along with strategies that will help you finally break the cycle and get on top of those debts.
1. Credit Card Debt
High interest rates and ease of access means that credit card debt isn’t only expensive but it’s easy to rack up. Step 1, cut up the cards, and move any recurring payments over to your everyday business account so that you don’t keep spending the funds when you make repayments.
Consider a balance transfer to reduce your interest.
When you can make a repayment against the card, following this up straight away with a phone call to your credit card provider to reduce the limit down to where you’ve paid it down to. Rinse and repeat.
2. Tax. GST, PAYG, PAYI, Income Tax
With so many taxes it can be really easy to get behind and suddenly find yourself playing catch up with the tax man. Start by provisioning for your GST and PAYGW. Setup another bank account to put funds aside for your monthly/quarterly BAS/IAS payments. If you can, also put funds aside for your income tax.
If you find yourself behind and can’t meet your payments by the due date, get on the front foot and enter into a payment arrangement ASAP. Make sure you enter into an arrangement that you can confidentially meet and remember that you’ll need to then meet your ongoing BAS and IAS payments.
It’s been well documented that a lot of small businesses haven’t been paying their employees super, at least not on time like they should be. So at least you know you’re not alone, but that won’t help you get caught up!
The best thing you can do is draw a line in the sand in terms of ending the cycle of not paying super for your employees. Start paying your superannuation every week/fortnight at the same time as your payroll. Xero’s automated super makes this really easy to do. Then start to pay down your outstanding superannuation when funds are available.
We hope these strategies can help your business start to get on top of your debt.