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GUEST COLUMNMANAGE YOUR BUSINESSDEBTRunning your own business is challenging at the best of times –in a slower economy its even tougherwith BRUCE BAILEYBRUCE BAILEY of BAB Consultantswas interviewed forthis column.Economic downturns and debt management challengesgo hand in hand, agrees Chartered AccountantBruce Bailey of BAB Consultants of Sharon,Ontario. But a tougher economy can be a benefit if itforces a business to analyze the core competenciesthat drive its success and the business owners are willingto make choices that are often difficult, but willimprove the business over the long run.Over more than 25 years as a CFO in a variety ofindustries, Bailey has helped many businesses managetheir debt in a slow economy to better position themselveswhen the economy picks up. That’s because, intougher times, these businesses turned themselvesinto nimble, focused organizations that protect theirbalance sheet.Here are some of Bailey’s debt management tips:• Keep your eye on your banking covenants and yourlenders in the loop. Small businesses usually need toborrow to finance their operations and drive furthergrowth. Management teams focused on running thebusiness, especially when they’re stretched to capacity,can easily lose sight of the requirements lendershave attached to their loans. If lenders find out thebusiness has breached its lending covenants – forexample, profitability levels or debt ratios get out ofline – they can, and often will, demand immediaterepayment of their loans. Make sure to keep yourlenders informed of your business activities.• Review the financing the business has in place andhow it is being used. Accurate, up-to-date cash flowreports are essential for knowing how the companySpending on things required to maintain the business’s operations are essential purchases.Capital expenditures, on the other hand, are not.is using its debt financing. How much goes to purchasinginventory, financing receivables, acquiringequipment and technology, or something else?Expenditures in each area will have different ramificationsfor your lenders and their financial covenantsand margin tests.• Differentiate between business needs and wants.Spending on things required to maintain the business’soperations are essential purchases. CapitalConnect CnnewithCourCthe tourists in yourown backyard.ard.100,000 plus home-grown own tourists live within a short drive of your business.Three issues Spring 2012 - Summer 2012 - Fall/Winter 2012.For enquires call 519.886.2831 x302 or email wanda.jackson@visitor.on.ca.a.jackson@visitor.on.ca.Space deadline dline for Spring 2012 issue January 30, 2012.Enquires are welcome anytime.www.visitor.on.caitPROUDSUPPORTS OF AREA ATTRACTIONS AND EVENTS FOR 34 YEARS.36 | w w w . e x c h a n g e m a g a z i n e . c o m
GUEST COLUMNexpenditures, on the other hand, oftenare not. Capital expenditure should besupported by a detailed capital budgetthat considers the effect on cash flow,banking covenants and how financingfor the expenditure will be arranged.Since most businesses face a variety offactors that influence their capitalexpenditures, it is important to keeptightly focused on your capital budget.• Understand your cost drivers and performanceindicators. Through activitybased costing, it is possible to developa detailed picture of the factors thatdrive the costs behind each activity. Byanalyzing customer profitability, forexample, you can determine whichcustomers are less profitable to yourorganization than others, allowing youto approach them on your terms andconditions. When you understand thesebusiness metrics – and keep them readilyavailable – you and your organization’sdecision makers will have theinformation needed to keep their fingerson the business’s pulse.• Think proactively when it comes tofinancing. The best time to ask forfinancing is when you don’t need it. It’sthe ideal time to arrange lease financingfacilities, establish operating linesof credit and even secure term debtfacilities. Shareholders may even havecash they could reinvest in the business.All of these sources of cash comewith different capital costs, and willaffect any decisions regarding additionalfinancing today and in the future.Think proactively when it comes tofinancing.The best time to ask forfinancing is when you don’t need it.with your customers’ expectations. Besure to follow up on high value invoicesso payments don’t lag.• Manage trade payables. Take advantageof all discounts available to you and besure the terms of sales you receive areconsistent with those offered to yourclient. While you don’t want to delayyour payments to the point of riskingfuture business with a supplier, youshould manage your payables to easecash flow crunches as much as possible.• Integrate your business informationsystem with your customers. Whenyour systems and documentation areintegrated with your customers it helpsreduce delays, especially when keydocuments, such as orders and invoices,have been identified and reconciledin advance.• Manage inventory turns. Turning inventoryinto cash saves organizationsmore than just the net realizable valueof the inventory. There are often manyother efficiencies that can be realizedwhen inventory turns increase.This column is provided by The Instituteof Chartered Accountants of Ontario.Show ThemWhat YouStand ForBBB Accreditation is a commitment to fairness andhonesty that lets consumers know you’re a businessthey can trust – a business that honours it’s promiseand embodies integrity. Give your customers theconfidence they deserve. They start with bbb.org.Shouldn’t you?X• Remember, times will change Today,the cost of debt is relatively low – butthat won’t last. When the economystrengthens, debt costs will inevitablyincrease. Plan for that now by buildinga strong balance sheet and prepare totake advantage of new opportunitieswhen they arise.• Manage the business basics Whileoften a challenge to do so effectively,it’s always worthwhile to manage thebusiness basics, but especially whendebt is a major concern.• Invoice as soon as goods or services aredelivered Make sure your invoices arecomplete and accurate and consistentStart With Trust ®Start at bbb.orgBetter Business Bureau ®519.579.3084N O V E M B E R / D E C E M B E R 2 0 1 1 | 37
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