Debt is a major issue for businesses of all sizes. It can be difficult to manage, quickly become overwhelming, and cause margins to suffer. This means that the company is making less money on each sale than it should be, and it can quickly become difficult to recover. If you're like most businesses, you're always looking for ways to reduce expenses and improve your bottom line. Many businesses are struggling in today's economy, and finding new ways to cut costs is more important than ever.
While it's rare to find a company that has no debt at all, there are a few companies in the S&P 500 that have managed to operate with zero debt such as Garmin, best known for their navigation products, and Align Technology Inc., best known for their Invisalign product, a clear teeth correcting solution. You can follow in the footsteps of these companies by minimizing your debt risk and maximizing your margins. But how?
By implementing the actionable strategies below, you can reduce debt and improve your margins, making your business more successful in today's economy.
Prioritize equity over debt
When a business takes on debt, it is taking on liability as well as an exorbitant amount of interest. Having this type of negative factor on balance sheets can create major problems if the company needs to raise more capital and, depending on your company's statements, it could be difficult to secure an attractive interest rate. Debt can quickly spiral and become a problem for businesses leading to negative consequences such as the risk of liquidation of company assets in case of default.
One way to avoid this problem is to give out equity instead of taking on debt. If the focus of your company is to increase margins and deliver profits, diluting the company and giving out equity can be an attractive solution. As a bonus, giving equity increases accountability in management, which increases responsibility, resulting in increased productivity and profits. Debt doesn't.
When a company gives out equity, it is giving up a portion of its ownership in exchange for money from investors. Simply put, giving out equity is essentially getting a loan from its investors. Some may view this as a risky move, but it can also be a smart one when you compare it to accumulating debt. The company will need to repay this loan over time, but it will have more flexibility than if it had taken on debt. Even though there is more flexibility, any company that goes this route should immediately make an action plan to buying back the equity.
Debt can be a risky proposition for businesses, and it often leads to financial trouble. Equity is not without risk either, but it can be a safer option for businesses that are struggling to pay down their debt. By giving out equity instead of taking on debt, businesses can reduce their liabilities and improve their chances of success in today's economy.
Do business with companies that have good balance sheets
While it's rare that a company will talk about their statements during the deal process, having an idea of what supplier balance sheets look like can be the difference between a good deal and a bad one. For example, suppliers with strong balance sheets may be able to provide smart and efficient credit terms with zero interest.
Credit terms are an important part of any deal, and they can have a major impact on your bottom line. If you're not careful, you could end up paying more for goods and services than you need to. To avoid this, ensure you understand the credit terms of your suppliers and try to work with companies that have strong balance sheets. This will help you get the best terms possible and improve your bottom line.
Fully understand credit terms
When you're trying to improve your bottom line, it's important to understand the credit terms of any agreement you sign. All too often, companies sign deals without fully understanding the terms and end up paying more than they should. This is a common mistake, but it's one that can be easily avoided by taking the time to understand the credit terms of your suppliers.
In addition, it's smart to stay conservative with revenue projections and work payment plans per your supply. In the case that you can't make payment dates, be upfront and let your supplier know in advance while providing them with an accurate estimation of when you can make a payment.
As a rule of thumb, you should be paying around 40% in advance or on material delivery, 50% throughout the project, and then a 10% guarantee or performance bond. Paying attention to credit terms and ensuring they're realistic can help you avoid financial trouble and keep margins high.
Improving your bottom line is important for any business, but it's especially important in today's economy. By taking steps to reduce debt and increase margins, you can give your business a fighting chance in today's competitive marketplace. Use these tips to get started, and you'll be well on your way to a healthier bottom line.
If you're looking to improve your bottom line, it's important to remember that a happy employee is a productive one. By focusing on employee satisfaction, you can increase productivity and revenue. In our next blog post, we'll explore how businesses can create a positive work environment that leads to happier employees and increased profits.