Is your small business facing a debt crunch? According to LendingTree, 74% of small businesses increased their debt to compensate for financial losses incurred during the COVID-19 pandemic. Iron Mountain Janitorial Services shares several tried and tested ways to handle debt and return to profitability.
Understand Your Financial Position
Draw Up a Budget
Prepare an operational budget. One method is using historical information; another is zero-based budgeting. Sort expenses into classes such as wages, rental, utilities, fuel, loan repayments, and advertising. Group income into different categories. Your budgets should cover a meaningful period such as your financial year.
Review Your Cash Flow
Cash flow is different from income and expenses. Your cash flow is important because without available cash, your business can’t survive, even if it’s profitable on paper. Improve cash flow by negotiating better payment terms with creditors and reduce customer credit terms.
Determine Assets and Liabilities
List your business’s assets and liabilities. If you’re operating as a sole proprietor, you can include certain personal assets like your home. If you have a company, you only list the company’s assets. In the best case, your assets should exceed your liabilities.
Develop an Action Plan to Return to Profitability
Evaluate each line of expenditure to see where to save money. Steps may include:
- Moving to cheaper premises or working from home
- Eliminating unnecessary services
- Laying off nonessential employees
- Minimizing avoidable expenditures
Find ways to increase revenue. Harvard Business Review notes that steps to enhance your sales strategy include:
- Improving customer service
- Adding complementary products to your line-up
- Improving marketing using local media and blogging. Don’t forget to make a logo using free tools online to add a professional touch to your marketing.
- Offering volume discounts
- Dropping unprofitable products
- Using rebates and coupons
Chase Down Money Owed
Follow up on late-paying customers. Start with those who owe the most. Be persistent, persuasive, and prepared to negotiate. You’ll be surprised just how much cash you can raise.
Don’t Give Credit
Don’t give customers credit—insist on cash sales. If contracting or in the service industry, try to negotiate a down payment so you’re not out of pocket if the customer defaults.
Sell Non-performing Assets
Sell assets you don’t need. Apart from raising cash, you’ll save on expenses. For example, if you have two vehicles but need only one, sell the other. Also, consider downgrading to a smaller vehicle.
Consolidate Your Debt
If you have debt from several sources, consider debt consolidation. You can reduce monthly payments and may be able to extend the overall loan term. Prioritize debt payments by clearing those with the highest interest first.
Work from Home
If you rent an office space for your business, you could cut costs by asking employees to work remotely. This would essentially mean finding a spot in your home to run your business, which could be problematic if you live in an apartment building. If possible, find a new place that can accommodate this change; take a look online to find an apartment with enough bedrooms for you to comfortably work and live without feeling too cramped.
Form an LLC
Regularize your business by forming a limited liability company (LLC). These are relatively easy to form and don’t need a lot of paperwork. They’re regulated by individual states, so check local requirements. The IRS doesn’t regard an LLC as a separate tax entity, so you can choose whether to pay tax as a sole proprietor, as a partnership, or as a corporation. An LLC protects your assets, increases trustworthiness, and is adaptable to most businesses.
Staying the Course
With a better understanding of the financial position of your business, you can identify ways to reduce debt and turn your business around. This may take time and patience, but it’s vital you stay the course. Forming an LLC helps by possibly reducing your taxes and boosting your financial position.
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