#businessunleashed

How to manage liabilities

Challenges for small businesses coping with debt

Risk is part of running a business. You can't easily plan for recession, natural disasters or other negative events, because if you take a too-cautious approach then you'll never succeed. But sometimes the odds will go against you.

If you find yourself unexpectedly further in debt than you'd like, don't panic. There are options available but they require action. If you sit back passively and wait for the worst to happen, it just might.

So take action. Manage what you owe before it becomes unmanageable. Here are some useful tips to help you take control of your liabilities.

Understand your situation and take action

If you’re facing increasing debt, take action instead of hoping for the best. If you fail to make payments on your debts, the consequences are often disastrous. They can include loss of employees, seizure of stock and costly court cases brought by your creditors.

Potentially worse than that is the risk of government intervention. If you fail to pay the taxes you owe, the government will come after their money.

So stay sharp and aware of your situation. Use good quality accounting software to keep a close eye on your outstanding debt and monthly payments. This information should be at your fingertips at all times.

After that, your priorities will depend on the type of business you run and how flexible your suppliers are willing to be. The following payment priorities are suggestions, but the actual order is for you to decide:

  • Payroll If you don’t pay your employees' wages on time you may be penalized for this. You may be able to renegotiate contracts with some staff, but that's likely to affect their morale.

  • Suppliers and business partners Avoid losing valuable goodwill with your most loyal suppliers and business partners.

  • Aged payables (60 days or more) If you don’t pay, your credit score will be impacted, which will affect your ability to borrow money in the future.

  • Bills Outgoing costs such as rent and utility bills need to be paid to keep the lights on! And again, not paying these could affect your credit rating.

  • Secured debts If you run your business as a sole proprietor or partnership, you might be held personally liable for debts, and creditors could try to take your assets. This is one good reason to form a corporation or limited liability company.

  • Insurance Especially professional indemnity and public liability cover.

  • Credit cards Avoid penalties or interest charges as these can pile up quickly.

Good accounting software is vital here. Without it you'll have little idea who, and how much, you're paying each month.