It’s not a good idea to sink into debt, even in the best of times. But right now, the economy is so uncertain, business owners have to be especially savvy about managing their debt.

The numbers are telling—the average debt is greater than $150,000 for small businesses in Canada, and a third of business owners are behind on major bill payments, like rent and credit cards, according to a June 2020 survey from the Canadian Federation of Independent Business.

Let’s explore how to navigate debt with a few key strategies, from getting a handle on cash flow forecasting, to being ruthless with expenses, to engaging early with your financial institution. Our advice includes suggestions for businesses large and small, and for experienced and beginner entrepreneurs.

Look ahead with your cash flow

When you take on debt, you need to take a long hard look at your books to assess what kind of future your business will have. “Cash flow forecasting is always fundamentally important,” says Dustin Paisley, Entrepreneur Strategist at ATB. “But it's not always at the top of the to-do list, and especially now, it's important to know your numbers."

He recommends setting aside time each week to assess cash flow, listing knowable expenses for the weeks and months ahead, which invoices are unpaid, establishing a plan to deal with them, projecting revenue against those figures and keeping on top of your finances as they fluctuate. No one knows how a potential second wave will affect the business economy, so try to make your best guesses based on comparable sales and expenses data from previous months.

One of our previous reports breaks down several ways you can lay out a cash flow forecasting spreadsheet.

That same report also suggests running a risk analysis on delays in your accounts receivables. It goes on to say, “If a significant percentage of your customers pay late (or default), you need a way to be predictive about the impact on your finances.”

‘It’s hard to change your margin but you can change fixed costs’

When a small business owner is struggling with debt, relief might not be in sight. The trick is to be proactive to make that relief happen, even if it comes in drips rather than a wave.

One helpful strategy is recognizing if any fixed costs can be shifted into variable costs, considerably lightening your expenses load.

“Maybe, if you’re a construction company, you can sell your expensive equipment and instead lease what you need,” Paisley cites as an example. “You really have to be ruthless with your expenses if you’re in debt. It’s hard to change your margin but you can change your fixed costs.”

Fixed costs can also include eliminating a brick and mortar store in favour of pop-ups with stronger e-commerce.

Another tip is figuring out if it’s worth continuing to rent office or storage space. A report from Toronto’s MaRS Discovery District recommends checking the expiry date on lease agreements and beginning “conversations on your cash flow challenges with your landlord. Then, review the trial balance for any expenses associated with storage or other locations you no longer need.”

You could also consider hiring students or changing roles to contract (versus salaried). For example, ATB X works with Venture for Canada, a student hiring program that is subsidized by the government.

Relief programs can help, but…

Canada and Alberta offer relief programs to struggling small businesses, but they generally aren’t simply terms-free cash. Despite a few subsidy programs, most of them are loans themselves, adding more to your debt, even if they can provide some short-term assistance.

Taking a hard look in the mirror before turning to available relief programs is ideal, says Paisley.

“Sure, you can get some runway with relief program money but you are just deferring payments because you have to pay this back at some point. When the relief program money is gone, what is your business going to look like?”

It’s also worth noting that government loans will be taxed. Having funds set aside to account for those costs come tax season could be key to ensuring the financial health of your business.

If you do decide to use relief program funds to help keep your business going, be forward-thinking. As Paisley notes in another ATB report, “use whatever runway these loans may offer to adapt to these very digital times right now. While many businesses already offer online stores, some have still avoided a full digital transformation, perhaps because of their traditional brick and mortar legacy. That kind of thinking has to change ASAP.”

Work with banking partners

If you need to create a plan to get out of debt, engage with your financial institution early on.

“They have an active interest in your business and can provide you with financing and advice, and they’ve seen businesses struggle before, so nothing is entirely new to them,” Paisley says.

“The conversation doesn’t have to be related to COVID-19 and what that’s done to your business. Talk to them when any changes happen to your business, and they’ll provide you with resources and a solid action plan to move forward.”

If your business has been interrupted in any way as a result of COVID-19, we want to help. Visit our COVID-19 relief page for business to learn how we may be able to help you navigate through your current challenges and start planning for what’s next.