Limiting Debt Levels – Its Importance

We all want our businesses to be profitable and successful. However, some businesses end up being more lucrative than others. This, of course, is due to a variety of factors: poor timing, market saturation, bad location, and improper financial management are among the chief reasons new businesses don’t succeed. 

While some of these factors may be beyond your control, ensuring financial business is done accurately and effectively is one of the easiest ways to plan for success.

Owning, opening and operating a business comes with a lot of expenses. Some are necessary, such as inventory expenditures, office overhead and monthly operating budgets and salaries. These types of mandatory expenses are guaranteed to exist every month and need to be built into any business plan.

Other expenses are often unforeseeable and can send a new or struggling company into a tailspin. A steep increase in fuel costs for a transportation business, expansion costs, upgrading old or compromised technologies are only a few of the unexpected expenses that can cause financial strain on a business.   

During times of unanticipated problems, many are tempted to incur debt that they would often avoid in normal conditions. Limiting debt is imperative to the growth and the health of a business, and while some types of planned debt can help fortify a business, others can be detrimental to the financial well-being and survival of a company.

Knowing the difference is key.

“Well, Richard Warke what is the difference?”

Let me explain.

Having monthly inventory debts and overhead expenses that are paid when due can bolster a business’s credit rating, which is beneficial when looking for an expansion loan or when seeking to broaden relationships with other businesses and/or sectors. 

While small amounts of the right debt are optimal, limiting debt overall should be a primary business objective. Making the best use of your available finances should be a key element in business planning and assessing new opportunities. 

Strict debt control is also crucial for businesses that plan to expand or grow operations. This means having a comprehensive knowledge of working capital and cash flows in order to plan any expansion of operations. A deep understanding of a business’s finances is often impossible for businesses that have high debt levels spread across multiple institutions or creditors. 

“Every element of working capital should be carefully controlled to maximize your free cash flow,” notes Info Entrepreneurs, a small business informational resource.  “Effective credit management and tight control of overdue debts are essential.”

Stringent financial planning can help facilitate growth by allowing business owners to anticipate their financing needs and plan accordingly in advance, or by allowing them to arrange suitable funding.

This may mean bringing in outside investors to provide the equity needed to underpin further expansion. New investors will be dissuaded to invest in a business that is carrying large debt levels or debts from multiple financial institutions.

Having good credit control is important for maintaining a healthy cash flow, a profitable business plan and positive business relations. Limiting debt loads can also make your business attractive to investors when the time is right.