Managing Debt for SME

Having a debt management for a growing business can be an effective way of doing business. Some small business owners are proud that they never have a debt. it is not always a realistic approach. Growth often requires large capital, and to earn the money requires you to seek bank loans, personal loans, a revolving line of credit, trade credit, or other forms of debt financing.  Then the question arise is, how much debt shall be required ? The answer to this question based on a careful analysis on cash flows and the special needs of business and your industry.

Guidelines below will help you to analyze whether taking a debt is a good idea for your company or not.

Consideration of Proposing Loan/Credit

There are several logic reasons to take a debt. In general, debt can be a good idea if used to enhance or to protect the cash flow, or to finance growth or to expansion. In this case, borrowing costs may be lower than the cost of financing, it moves through sustainable income.

Some common reasons for seeking a loan are include:

1. Working capital. When you are looking to improve or increase the supply of labor or inventory.
2. Expanding new markets. When companies enter new markets, they often face longer collection cycle or must offer more favorable terms for new customers. Loan funds can help to overcome this period.
3. Capital spending. You may need to finance new equipment to move the business into new markets or expand your product line.
4. Improving cash flow. If you still have a long-term debt of less than 10 years, refinancing can improve your cash flow performance.
5. Building trust with the lender. If you have never borrowed before, taking out a loan can help in developing a good payment history. It can engender trust and helps to obtain future financing with greater ease.
6. Planning effectively.

Before taking a loan or other financing types, you should plan your capital needs. The worst time to take any kind of debt is when you in crisis. Sudden loss in business, unable to pay salaries, or other emergency that forces you to immediately take out a loan, and put you on a very unfortunate position. A capital budgeting will allow you to predict how much cash needs, determine what will be needed and when it is needed. This will give you extra time to explore all possible borrowing sources and negotiate the terms that is most profitable. Capital budgeting should consist of a complete review of the Balance Sheet to help you analyzing the cash flow, assets and liabilities. You also need to make pro forma statement, which is projected balance sheet for the next 1-3 years.

Better Short-term or Long-term Debt ?

Besides the right reasons you consider before taking out a loan, you also need to ensure the right type of loan that will be taken. For example, you take short-term loans while the long-term loan is more appropriate. This could lead to financial problems, because the monthly payment is big enough and you have not enough money to pay it.  Then you may make decisions that are not necessary, in example to sell business assets, to meet  your liabilities.

In general, the use of short-term loans are for short-term needs. This will help you avoid higher interest burden and more stringent than the condition of long-term loans. For example, if you are experiencing a rapid increase while sales - such as those caused by increased seasonal demand - then you should look at the short-term loans. If the growth will continue in the long term, take a look at other long-term line of credit expansion based on sales, receivables, or the ratio of inventories. The term of your debt will have no impact on the debt to equity ratio. However, you will see changes in liquidity indicators such as current ratio, because currently only covers the debt obligations that must be repaid within one year, instead of debt that matured in the coming period. Thus, the positive long-term loans can affect your liquidity ratios.

New Debt Should Be Based on Current Needs

While the low interest rates and cheap money are interesting you, you may be tempted to take out a loan to buy equipment or to make other capital expenditures. If that is what happened with your business, be sure to base your decision solely on your current needs. Possible increase in tariffs is not a reason to spend money on something you do not need. For example, if you need additional computer equipment, you may want to take out a loan to buy it. However, buying additional computers now because next year the price will be more expensive, has not enough justification to buy them. You will get stuck with unnecessary equipments and debt must be paid.

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Guidance in Buying Insurance

1. Select a healthy company with a reputation of insurance agents and claims service is good. There are certain health ratios for insurance companies which can be accessed at each portal or portals insurance association.
2. Find a product with the lowest cost, find insurance providers that offer the cheapest prices for products that required protection. Alternatively, search the resource persons (agents) who are educated and trained insurance. With his help, determine the amount of protection required.
3. If you have a need for living expenses when the children grow up, pay the mortgage, pay the kids college tuition, purchase a term life insurance. If you do not have the need to pay property taxes, to support school children with Down syndrome at home, continue to support social institutions after death, providing additional income for life for the spouse left behind, then buy a whole life insurance.
4. If no person who depends on you financially, do not buy life insurance. Do not buy life insurance if you do not need, for example, when we are still very young, because we died a smaller probability.
5. Buy a term life insurance if you need such a large but limited budgets, for example, to those who have small children. If the child grew, working parents need to purchase an additional policy. For young families, purchase of life insurance products that ensure the rejuvenation options contracts based on market developments and the conversion became permanent. Compare the costs and types of insurance protection offered by your office work versus purchasing their own insurance, because there minusnya plus appropriate conditions respectively.
6. Increase the protection of your family by purchasing an individual life insurance products and not from an office or other parties (if any) for protection will be terminated (for reasons of work that causes us to move the suspension of premium payments the insured is still alive).
7. Do not compare with the cash value protection died, as if expecting the value of investments at the end of the period of protection (we do not die) so often we are disappointed to see the cash value will be equal to the premiums already paid. The need is to prepare that gives adequate protection death benefit on the left so it does not create financial problems in the future.
8. Consider what is optimal for you, buy property insurance and credit insurance from a bank mortgage providers (insurance companies and diversified insurance policy for the various needs of) or buy an insurance policy that can protect the entire needs of the people we leave behind. This is because we must compare what the optimal benefit and which are most appropriate use condition when the family left it in case of risk of death.
9. If your spouse also works, you should insure your spouse earning potential. If the party who dies is a greater income, then if not insured will cause new problems.
10. Calculate your insurance goals, record and list the name and address of insurance, policy number, value death benefit, the beneficiary, the insurance agent's name and telephone, the policy effective date, and location of initial policy.

You love your family and children? Wise and prepare your insurance policy now

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Plan Your Finance

Learn to think in terms of spending money, by considering the following questions:
1. What are my purchases are items I really need?
2. Is this a need or a desire?
3. Is there another alternative for the goods that we need those with a lower price with good quality ?
4. Can these purchases be delayed a few moments?

In short, if can not buy, do not have to buy. It is not being so stingy, but do so wise and clever to determine which is necessary and which is not necessary. Try the simple life, so you shall be more easily in managing your family finances.

Make an analysis of your spending and set financial strategy further by looking at:
1. Priority Scale. Just determine which one is the expenditure priorities. Then immediately eliminating unnecessary expenditures.

2. Percentage of expenditure. Just calculate how much of each type of expenditure to your total expenditure transactions, then sort of the greatest to the smallest.

3. Learn how you can be big spending, is the nature of need large ? if yes, it must be diminished, especially related to the consumption.

4. Create an analysis of how much money you use for consumption, how much money is used for investment, how much money used to pay your obligation.

5. Learn your shopping patterns, whether you are shopping with a credit card or by cash, whether you are shopping with a shopping list or not, where you shop, what attracted to any discounts are not necessarily proficiency level in these items you need.

The aim is to ensure that expenditure is an expenditure that you are smart and wise, that is shopping only for the real needs to be spend , and make sure you firstly cut of at least 10% of your income to put aside for the future of your family.

Do not let your big pin from the mast, which is ultimately your own deficit and dizziness.
Save and invest your money wisely for future needs, do not be wasted to satisfy today's consumptive lifestyles.

Strategies to form a large net cash flow is to increase income and reduce expenditure amounted to perhaps as little as possible and then use the surplus or net cash flow for additional investment and / or long-term financial needs and protection of families and increase your emergency reserve funds when you still have not fulfilled . If necessary, you need to make radical changes in spending patterns or shopping, so that you become healthier and produce instant profits for your family.

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