Short term finance - Debt management

The capital structure of every business involves the element of Debt. It may be Short term or Long term. Long term Debt fulfils the long term needs of business i.e. more than 3 years on the other hand the Short term debt accomplish the recurring or short term needs for the business. Generally the long term debt can be raised from different financial institutions and bears less interest rate rather than short term debt. Short term debt can be managed from the fund available in the business itself.

The debt management is very important for survival of any business. Without effective debt management business may face bankruptcy situation despite of earning profit. There are some basic standards for maintaining the balance between debt and other elements of the capital structure in any business. The ratio between the Debt and Equity should be 2:1. This is an ideal ratio. If the volume of Debt gets higher up in any business than the obligation towards interest liability also elevates and it has to pay this obligation without bothering about profit or loss. Debt should be managed in such a way that the fund neither remain idle for a longer period nor generates the shortage of fund. Due to the shortage of fund the business would not able to pay its recurring expenses which is necessary to run business day to day. Along with that due to the same problem material cant be procure at the time which may cause the delay in the production resulting in loss of machine hours and labour. The delay in production may al so cause the shortage of sales due to non-availability of finished goods.

On the other hand the availability of fund more than requirement enhances the interest cost to the business, which is also unsafe for the financial health. Therefore it is essential to manage the debt in a professional manner. Having the debt in a business is not frightful as long as it is paid off within time. One must analyze the financial health of the business time to time and should also carry out the required steps to maintain it. One can correlate the debt to the income by calculating the debt income ratio. This ratio can be figured out by dividing the Debt amount by Income and multiplying it by 100. 30% is the idle ratio and above 30% but below 40% is good indication but over 40% is the sign of red flag for a potential financial disasters. Developing a proper budget for the future financial needs is a tool for ensuring the effective financial needs. The financial needs can be estimated properly if the budget is planned after appropriate evaluation of business needs.

Debt management should be very much effective to maintain the creditability of any business. If a business has good creditability then it can raise the fund smoothly from any financial institution. Protect your credit is the best way to control your debt. If unexpected expenses or bills are found that could you are not be paid at time then quick online payday loanis a good way for a personal finance to protect the credit rating. But this can be used for the short term financial needs. It is not suitable for the long term requirements. Some people have negative views for this type of cash advance but if it is arranged properly and in a responsible way then it can prove out very beneficial for any business. One should take care to read the details carefully before applying for an online cash advance loan cash advance Company.