Dealing with debt is not at all easy whether it is an individual or an entrepreneur, yet it is all too common for individuals or business owners to take on debt. It is only when you know the difference between productive and reductive debt that you will be able to manage debts properly and keep yourself out of it.
As an entrepreneur, it is crucial that you know that all productive or good debts come in various forms such as loans, lines of credit or a mortgage. Good debts can be used for the benefit of your company which is why these are also called productive debts.
On the other hand, bad or reductive debts are those that cannot leverage your business, and the money is wasted typically in buying things you cannot really afford given your current financial health. These expenses will never produce any good outcome.
Reason to get into bad debts
Ideally, there are three principal reasons due to which the entrepreneurs get into bad debt. These are:
- Fluctuating flow of cash in the business – It is the ups and downs of business results in fluctuating cash flow. Nothing seems to be more exhilarating to see that there is a constant flow of cash into the business, but usually, there are times when your business will have months with terrible cash flow. You do not foresee it and therefore underestimate its consequences on your business. You turn towards the easiest way to smooth the difficult times and use the credit cards and at times even more than necessary. With intent to restore economic balance and assuming that you will pay off your credit card debt next month, you let the crisis begin.
- Pressure on business – The high demand and fierce competition in business forces all entrepreneurs to put too much pressure on their businesses. Many a time, entrepreneurs start to live on the income of their business and most of the times they live lavishly. The business, however, cannot support their extravagant lifestyle, and the financial health starts to crumble. Hence, the business needs reinvestments, reserves and time to mature so that an opportunity for consistent cash flow is created. This forces the business to take on debts, mostly bad debts.
- Being overconfident – This is perhaps the most significant reason to incur bad debts. The entrepreneurs most of the times believe that the debts they take on are being used for productive purpose while it is just the opposite. They believe they are wise and cautious, but it is much on the contrary. This means that they overextend in reality. Just a few years of good business and entrepreneurs start to think it is time to expand their business and increase their debts to expand as quickly as possible. Add to that the changes they make to their lifestyle contemplating the new income level results in the downturn in the economy, loss of a few big and significant customers and a change in their industry. There is a substantial drop in revenue and profit, and things start to get beyond control. The financial situation becomes pretty rough, and most of the entrepreneurs in such conditions end up losing their company.
Getting out of reductive debt
Well, if you as an entrepreneur face such a situation, there is no reason to think that it is the end of the road. In fact, you will get a lot of tips and strategies to follow to get rid of your ever increasing debt visiting useful websites like nationaldebtreliefprograms.com and others.
The need of the hour is to expunge all of your bad or reductive debts to ensure a smooth road for your long-term success. Implementing a strategic debt management plan is critical in such situations.
Simple strategies to follow include:
- Creating a debt management spreadsheet or analysis that can take your debt management plans and process on a fast-track than you ever imagined
- Stick to your simple plan with diligence and
- Celebrate when you reach each milestone in your debt management plan.
You will need to follow each step with caution, and these steps include:
- Determine the amount of your monthly income that you can successfully commit to eliminating your debt making sure that you are honest to yourself and commit as much as possible
- Making a list of all your bad debts in a chronological manner starting with the most significant debt at the top of the list
- Making sure that the minimum payment is included next to each debt on your list and finally
- Implementing your plan.
The working process is as simple as formulating your debt management strategy. Start paying off the smallest debt in full as quickly as possible and for all the others continue paying the minimum amounts. This will prevent the accumulation of debts and overdue.
When the smallest debt is fully repaid, use that money saved to pay off the next larger debt till this is eliminated as well. Repeat this process over and over again until you see all your debts are gone. However, you have to be diligent enough not to take on any new debts during this time.
Staying out of debt
The best way to succeed in debt management is to keep out of debt in the first place. For this, you will need to plan your moves well in advance. The core business strategies to follow in this regard are:
- Minimize your expenses constantly as being frugal is okay than being unwise and be extravagant.
- Hire employees only when necessary, and you think that you can afford to hire a few
- Expand your business when financial situations, as well as market conditions, are favorable
- Be sure about increased sales if you want to expand and not just hope for a growth
- Avoiding unnecessary spending and consider the opportunity costs always when you have to make any financial decision.
- Try to grow business profit as much as possible
- Be cautious not to overextend yourself even if you have productive debt.
Lastly, always have abundant cash reserves to deal with potential downturns and emergencies.