Dear Aunty B,
My company has incurred a fair amount of debt over six years in getting to where we are. Now repayment of that debt is eating up a large portion of our profits, denying us capital that would help us grow more. My question is this: do we scale back for a while to repay debts faster, or continue to push the limits of our income with a slower repayment period?
Carrum Downs, Vic
Your problem, my friend, is not debt but strategy – or lack of.
When you are pursuing the light on a hill in the belief that all will be well financially, you can often be deluding yourself. Making a profit is the key to success. If you are not profitable at the moment and you are eroding your capital, then you need to immediately focus on making a profit on present sales rather than worrying about increasing sales.
Remember this: borrowing only makes sense if the additional business will generate more than the cost of funds. Even if you can manage the bigger business, how are you sure new clients will pay?
What happens if something unexpected turns up?
Have a close look at all parts of the business. Can you free up cash flow by improving collections and negotiating contracts so that customers pay in advance or as they go?
Sorry about that, Unsure. I would much rather tell you to go for it but my gut – which I might add is in great shape and needs NO downsizing – tells me that it is cost cutting for you and yes, that may well mean downsizing.
Your Aunty B