Debt management in business

We got some good feedback regarding our column, “Understanding the P11.3 trillion Philippine Debt” and also some requests to write about managing business debt, especially during this pandemic economic crisis. Yes, the reality now is that many businesses, corporations, SMEs, and family enterprises have overdue loans/debts. They are also unable to access additional credits as banks and other lenders have tightened their credit/loan criteria due to increasing overdue loans. But, for businesses to survive and recover, loans have to be available. The government through various emergency soft loans programs, and the Banko Sentral ng Pilipinas have been by easing loan access by SMEs and adding liquidity to the financial system, still many businesses may not survive another year.

Debt Management is part of two Finance subjects I use to teach in the UP School of Business, and it had always been part of my work as CEO/CFO in the companies I worked for over the years. I did work for small, medium, and large conglomerates, and debt management was always a focus, being a major part of corporate strategy. I remember being part of a team managing debt in a crisis situation for a large Philippine financial group, and another time for an Asian conglomerate, and my MBA degree and my experience were almost exhausted. So, here goes our short course in debt management.

The basic concepts of debt management for big and small companies are the same. The advantages of large companies are in the availability of more debt sources and flexible terms. Paramount is the financial structure/balance sheet of the business. If the business was properly planned, projected sources and application of funds would be imbedded in the feasibility study, as every type of business has an optimal balance sheet structure. Over the years, as the business grew, diversified, and expanded, this balance sheet structure may have changed for worse or for better depending on management. Given that this pandemic crisis is massive and unprecedented, businesses that maintain strong financial structures will survive better than others.

The basics are; debt to asset proportion, debt to equity ratio, current assets to current liabilities ratio, cashflow cycle of your revenues, composition of your liquid assets, and strict definition of the working capital. Then you have the secondary sources of cash flows which will be your bank credit lines, suppliers credit, financing and factoring companies. These secondary sources of funding are dependent and accessible on the strength of your financial statements, as they will be looking at your ability to service the debt and/or security in terms of assets. While the allegations that “banks will give you umbrellas when the weather is fine but not when there is a storm” may be partly true as banks are less strict in good times, good banks actually want your business for the long term as it is more profitable for them. Debt management is about good planning, execution, and control which is really good management.

In the current economic crisis, it is probably the disruption of your normal cashflow cycle that is causing the debt crunch. Sales are down, so receivables and collections are down. If the revenues are not expected to recover soon or there are no other options to increase revenues, then the next step is to reconfigure or scale down your balance sheet by asset disposals. Outright sale of fixed assets or sale with leaseback for critical assets may be explored. Then, operating expenses have to be reduced to the level optimal for the size of the operation.

If your business has survived after 16 months, there is an 80% probability it will survive this crisis, as all economic and business indicators are slowly going up, even with the governments inadequate responses and initiatives. “Tough times never last, tough people do.”