How much debt financing is right for a business? Possibly, the more important question may be, “what would it take to run the business without any debt?” Operating a business on the cash flow generated from operations is easier and lower stress than being saddled with a lot of debt. It also increases control over the company.
With a good focus on cash flow and a deliberate plan to reduce debt, it is possible to achieve the objective of being debt free. The elements of a robust cash flow plan will likely include a sound understanding of the classic elements of the sources and uses of cash. In simple terms, you want to increase the sources of cash and reduce the uses of cash to the extent possible.
Benefits Of A Debt Free Company – Sources of Cash
Sources of Cash
Improve the efficiency of revenue generating processes
Collect customer receivables faster
Turn inventory faster and reduce the inventory balance
Lengthen supplier payment terms, request early pay discounts, or take full use of existing terms
Reduce operating expenses
Increase gross margin of products or services
Benefits Of A Debt Free Company – Uses of Cash
Uses of Cash
Increasing working capital in all its forms – A/R, Inventory, etc.
Increasing interest expense as a result of increasing debt or rate increases
Increasing operating expenses – payroll, benefits, rent, travel and entertainment
Capital expenditures
Adding employees or contractors
Decreases in gross margin
Benefits Of A Debt Free Company – Conclusion
Successfully implementing these actions so that the sources outweigh the uses will increase cash flow in the business. The CFO is then able to turn this into a comprehensive financial plan to determine when the business can be debt free. Without debt in the business, owners are no longer reliant on other entities for success.
Debt isn’t always a detriment. In fact, B2B CFO® has helped clients obtain hundreds of millions in debt financing. These clients have largely been growing businesses where a loan can be very helpful to support capital expenditures and increased working capital to support additional revenue. When used properly growth supporting loans are paid off when the revenue growth and increased profitability are achieved.
Click here and see how one of our B2B CFO® professionals can help your business flourish!
photo credit: 3D Shackled Debt via photopin(license)
How much debt financing is right for a business? Possibly, the more important question may be, “what would it take to run the business without any debt?” Operating a business on the cash flow generated from operations is easier and lower stress than being saddled with a lot of debt. It also increases control over the company.
With a good focus on cash flow and a deliberate plan to reduce debt, it is possible to achieve the objective of being debt free. The elements of a robust cash flow plan will likely include a sound understanding of the classic elements of the sources and uses of cash. In simple terms, you want to increase the sources of cash and reduce the uses of cash to the extent possible.