We know by indebtedness the relation between a company’s own funds and the debts with third parties. If the debt figure is excessive, it can become a problem for the company.
It will lack liquidity since it must face expenses, financing, and interest payments. To control indebtedness, we must carry out a series of precise measurements on our balance sheet, assets, types and financing models, etc.
Based on this analysis, we will be able to determine if we are ready to apply for new loans, if we should review the return of the current ones or if we should use alternative financing formulas that help us control our risk rating.
How to Measure the Degree of Indebtedness
The optimal level of indebtedness of a company is not a standard formula in all of them but will depend on the resources of each one. It is about having and maintaining a balance in business assets between own financing and that of others.
Controlling the level of indebtedness is essential for a company to function correctly.
To control it, according to a document published by the Abanza Soluciones consultancy, the following tools can be used: The balance sheet.
In percentages, knowing exactly how much of the company’s capital comes from outside financing, its resources, etc. Cash flows in and out.
Details of indebtedness due to maturities. When they comply with each of the current loans, details of the financing conditions, etc. Ratios.
For economists, this is the easiest way to know the financial status of a company. It is about comparing previous periods with present and future projections.
Within the ratios, the most used are Total indebtedness: Passive/Active. Indicate the totality of the debts and the income that the company has. Debt quality: Current liabilities/Total step. Indicates the short-term and total debts of the company.
Debt Repayment Capacity
Cash Flow/Short-Term and Long-Term Loans. The flows of money that enter to be able to assume the Debt. Cost of Debt: Financial expenses/Debt with cost. The financial expenses derived from the loan are the interest on the financing.
The Financial Cost of Sales
Financial expenses/Sales. Indicate how much it has cost to sell the product or service. If a loan has been requested to sell, subtract it from the sale.
Solutions to Excessive Debt
Financing to grow as a company is a natural process for corporations. Investment needs in personnel, machinery or new markets are essential to continue growing. However, you must know how to borrow to stay within certain limits that can sink the company.
When a company takes out a loan, it must pay that money back and interest. This last question is the one that aggravates the indebtedness. There are several alternatives to traditional financing (such as a bank loan) to avoid this. Factoring is one of the most used.
It consists of assigning the collection rights to a financial entity so that it can manage the collections with the clients and advance the amount of the invoices to the assigning company.