Determining the best debt design for your business is critical in order to maximize profits/cash-flow, provide liquidity, and manage risk.
The major reasons for debt problems are excessive optimism, over-leverage, inadequate financial projections, and improper structuring of short-term and long-term debt.
Industry leaders always have a low debt-to-equity ratio! The higher the ratio, the higher your risk. It is very important to structure your long-term and short-term debt to be appropriate for the long-term and short-term needs of the company.
The key is to use equity for acquisitions, long-term debt for long-term expansion, and short-term debt for seasonal needs. Violating this rule invites trouble.
Good business performance is directly linked to good business planning integrated with good debt structuring. Financial leverage can be your friend or your adversary. Follow these five steps in order to make it your friend:
- Carefully define reality by preparing an annual business plan.
- Maintain a sound debt-to-equity ratio.
- Prepare a reliable financial forecast, including profits, cash-flow, and capital requirements.
- Carefully design your long-term and short-term debt structure.
- Maintain fiscal self-control in implementing your plan.
The ABA Insider is published by American Business Advisors, Inc. to provide business and personal improvement information and ideas. All material is presented to provide general and broad information only. The information found in this publication does not constitute business, tax, financial, or legal advice and should not be acted upon without seeking the counsel of professional advisor.