For entrepreneurs, and especially for startups, balancing debt can be a major challenge. Between the costs of starting a business and keeping it running, debt can mount up quickly. The average small business owner carries a debt load of $195,000, compared to $96,000 for the average consumer, credit reporting company Experian reports. More than three-quarters of small business owners carry debt, a poll by Wells Fargo and Gallup found. Of these, nearly half say that nearly two-thirds say it is somewhat, very, or extremely difficult to pay down their debt. Almost two-thirds are somewhat or very uncomfortable with the debt load they’re carrying.
One key to staying out of debt as an entrepreneur is having a sound debt management strategy. Here are three keys to balancing your debt while your business is in the start-up phase in order to set yourself on track for a profitable future.
Create a Debt Management Budget
The foundation for an effective debt management strategy is a smart budget that factors your expenses in so you have enough cash on hand to cover your debts while still running your business. A best practice to create a budget when you start up your business is to draw up your three key financial statements: your balance sheet, income statement, and cash-flow statement. Your balance sheet lists your assets, including cash as well as other assets such as accounts receivable and inventory, and balances these against your liabilities and stockholder’s equity. Your income statement shows how your assets and liabilities were used during a given period and how they break down into revenue and expenses. Your cash flow statement shows how much cash flowed in and out of your business during a given period. Together these statements show the overall financial state of your company, including your debt obligations and how they stack up against your cash and revenue.
As a step toward creating your financials, you can start by tallying up your income sources and then listing them against your monthly fixed costs, variable expenses, and one-time purchases such as equipment expenditures, recommends accounting provider FreshBooks. This will give you the raw data you need to draw up your financials. You can then see how much cash you need to be generating in order to offset your debts.
To use your financials effectively, it’s important to estimate your revenue and expenses as accurately as possible. Use your past revenue data as a baseline to help you estimate your projected revenue, taking into account any anticipated increases in your marketing and sales activity. For expenses, break your expenditures down into major categories, making sure you budget enough for important operating costs. In particular, as a general rule, expect to spend about 10 percent of your revenue on marketing in order to generate sufficient income to keep your business running.
Keep Your Operational Costs Low
To make your financial plan work, it’s vital to employ strategies to keep your operational costs to a minimum. One basic strategy for cutting costs is to use a business model with inherently low operating costs. For instance, Amway uses an efficient business model that does not require you to maintain a workforce or large amounts of inventory, allowing you to keep your operational costs to a minimum so you can keep more profit.
Another major strategy for keeping your operational costs low is to outsource, says accounting software provider QuickBooks. Non-core routine tasks such as bookkeeping, tax preparation, IT, and customer service can be outsourced to cut your payroll costs and free up your time to focus on essential, core business functions that truly need your attention.
Another key strategy for minimizing operational costs is automation. For instance, marketing automation platforms such as HubSpot can reduce the time and labor you expend on repeated routine tasks such as publishing your content, syndicating content to social media, and managing your email list. Other tasks you can automate include syncing your sales transactions with your bookkeeping, updating your inventory, and using chatbots to handle routine customer service inquiries.
Develop a Smart Financing Strategy
Having a financing strategy to cover your expenses is another key to balancing your debt. While it’s ideal to cover your expenses from your revenue, in most cases, you will need some type of financing. Traditional financing can be difficult to obtain, so one alternative is revenue-based financing. With this method, you arrange with your creditors to repay what you borrow out of the revenue you generate from sales. For example, a lender might agree to supply you with a percentage of your monthly revenue in exchange for their share of your profits.
Another efficient financing method is bootstrapping. With this method, your creditors extend you short-term credit based on your projected sales. For example, if your typical turnaround time for selling inventory is 30 days, you might get your supplier to let you pay them on 60-day cycles, giving you enough time to cover expenses from sales. Another bootstrapping method is factoring, which is when a finance company purchases your receivables in return for providing you with capital to cover your operating expenses.
Creating a debt management strategy based on your three key financials allows you to plan your cash flow to cover your debt. Keeping your operational costs low through strategies such as outsourcing lets you implement your financial plan so that your budget stays manageable. Using smart financing strategies such as revenue-based financing and bootstrapping helps ensure that you can cover your costs by filling in the gap between your revenue and your expenses. Together these strategies can help you keep your debt in sync with your revenue so that your business stays profitable.
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