Updated: Jan 12
Growing a business is a long and stressful journey. In this process, you have to make critical—often risky—decisions to steer you in the right direction. At one point, you might find that your best option is to enter into a debt finance agreement.
Here, the goal is to translate the debt into long-term profitability. And this wouldn’t be possible without knowing how you will repay it. And so, before anything, you have to create a debt repayment plan.
In this episode, we discuss the importance of planning for debt repayment even before entering a debt finance agreement. You don’t want to take the risk and approach a lender without knowing how to repay your debt. That said, we lay down the four steps in planning your debt repayment. We tackle key aspects that will help you determine if debt finance is right for your business.
Do you want to know how to plan smartly for getting into debt finance? Tune in to this episode to learn more!
Three reasons to keep on reading this article on debt financing:
Understand why you should plan for debt repayment even before approaching a lender.
Think like a CFO and learn the four steps in planning for debt repayment.
Discover the benefits of creating a business forecast in debt finance.
Debt Financing Resources:
Visit Christina Sjahli’s website for related episodes on the Her CEO Journey™ Podcast.
Chat with Christina and set up a time here!
Why You Should Plan for Debt Repayment Before Getting Debt Financing
Many women in business fear getting into debt. A way to conquer this is to plan for debt and interest repayment even before approaching a lender.
It’s never a good idea to take debt without a finance strategy such as a repayment plan. You have to know how much you can afford to pay and what your business would look like after. Otherwise, you will be putting yourself into a Russian roulette-like situation; there’s no financial security.
With that, let’s unpack how to think like a CFO in terms of debt repayment.
Think Like a CFO Step #1: Create a Debt Schedule
A debt schedule shows all the debt a company has or plans to have. It will show the estimated monthly principal, interest, and maturity dates.
Having this schedule is useful for three reasons. First, it is beneficial when you create a financial forecast. Second, it allows you to monitor the debt maturity and make decisions based on it. Third, it presents the cash flow requirement related to your outstanding debt. This way, it becomes easier to plan your future cash flow.
Think Like a CFO Step #2: Review Historical Financial Results
Review historical financial results in your income statement, balance sheet, and cash flow for the last 24 to 36 months. Understanding the historical trend in your business enables you to predict future outcomes.
Of course, you need to make sure these results are accurate. The worst thing you can do is attempt to analyze incorrect data and predict the future based on that. In this case, attaining accuracy means using the accrual method of accounting instead of the cash method. You have to ensure that every single transaction is under the correct category.
Pay attention to the following when analyzing your results: customer performance and key metrics. Take a hard look at your customers. Which ones are doing well? Which ones are struggling?
Then, assess your key metrics. These metrics include all your profits and expenses, as well as your competitors. By doing so, you can take them into account in building your assumptions.
Think Like a CFO Step #3: Clearly Identify the Assumptions
Creating assumptions is part of business forecasting. The key in developing your assumption is, again, your historical trend along with external factor-based predictions. That's why you need to understand the industry standard and your competitors' performance.
Remember: creating your assumption is an art rather than a science. Tune in to the full episode to obtain the list of key assumptions you need to identify! Once you have created your assumption, then you can start making the forecast.
Think Like a CFO Step #4: Create the Forecast
Here, you will combine the information from your debt schedule and your historical financial results. Then, you will apply the assumption you have created to get the estimated future financial result.
Creating a forecast allows you to see if debt financing can help you grow the top line. Consequently, it becomes a tool for determining if debt financing provides the expected profitability you have in mind.
Moreover, having a forecast presents you with a clear view of future cash flow. This way, you can determine if you can afford to make your debt finance and interest repayments until the maturity date.
CFO Services for Debt Financing
If you are still uncertain about debt finance and all that it entails, we’re here to support you. We understand that you want to focus on building and expanding your business for good.
Together, let’s create a financial strategy that ensures financial security for you and your business. Set up a time to chat with us to know more about how our CFO services can help you with debt finance!
Enjoy this Episode on Debt Financing?
Are you thinking about going into debt finance as a strategy to gain financial capital? Before you do so, you first need to think about how you’re going to manage your debt finance and interest repayments. Having a plan in place ensures that you’re going into any deal blind.
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Christina Sjahli: One way to conquer the fear of getting into debt in your business, especially for mission-driven female founders, is actually by planning for the debt repayment and interest payment before you approach anyone who wants to give you money. It does sound counterintuitive, doesn't it: planning before even knowing if anyone is interested in giving you the debt?
But let's rethink this: If you are taking a debt without a plan to repay it, not knowing how much you can actually afford to pay, and no clue on how your business would look like after you take on the debt, then it's similar to playing Russian roulette. You don't know when the bullet is going to hit hard.
You're listening to Her CEO Journey, the business finance podcast for mission-driven women entrepreneurs. I'm your host, Christina Sjahli. If you are new here, a big warm welcome. If we are not connected on LinkedIn, please reach out and say hi because that's where I hang out and share my business finance tips.
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After years of sweat equity and stress, which I know the stress of building a business, do you really want to take the risk of entering into a debt-financing agreement without knowing how to plan for the debt repayment? In last week's episode, in Episode 135, we share how to think like a lender and assess if your business can afford debt financing. In this solo episode, let's unpack how to think like a CFO and plan for debt repayment even before you approach a lender.
One of the first steps a CFO would do, and this is exactly what I would do for my clients, is creating a debt schedule. A debt schedule simply shows all the debt a company has or plan to have. So the schedule will show if it's plan to have, its estimated monthly principal, estimated interest, and estimated maturity dates. And it is useful for the following three reasons.
Number one, the schedule is very useful when later we get constructing or creating a financial forecast. Number two, it allows you to monitor later on in the future, the maturity of the debt and make decisions based on it. And number three, it shows you what is the casual requirement related to your outstanding debt or possible outstanding debt, which makes it easier to plan for your future cash flow.
The second step a CFO would do in planning for debt repayment is actually reviewing the historical financial results included in the income statement, balance sheet, and cash flow for the last 24 to 36 months. This is an important step because you want to understand the historical trend in your business, so you can use it to predict the future.
You want to make sure these historical results are accurate and reflect the true situation of your business. Accurate doesn't mean all your bank reconciliation or DUNS. Accurate means you have used the accrual method of accounting instead of cash method. And you know every single transaction has been categorized properly.
The worst thing you can do is attempting to analyze incorrect data and predicting the future based on incorrect data. Getting debt financing is already a big decision for you with what can be a long-term commitment. You want to make sure your data is planned for debt repayment accurately as well.
When you start analyzing your financial results over the last 24 to 36 months, pay attention to the following: One, take a hard look at your customers and analyze which ones are doing well and which ones are struggling. Those customers that are struggling can create cash-flow problems for your business in the future. And this may impact your ability to pay your debt.
Number two, pay close attention to the key metrics like cost of goods sold over revenue, gross margin, operating expenses over revenue, net profit, the weighted average price of your product or services, customer long-term value, and customer acquisition costs. Don't just focus on your numbers either. Take a look at your competitors. If some of your metrics are well above the industry standard right now, dive into why you are doing better than the competitors so you can take this into account in building your assumptions.
The third step a CFO would do is to clearly identify the assumption to build the forecast. Creating assumption is part of forecasting. It is one of the tools that makes prediction possible. The key in creating your assumption is your historical trend plus what you think can possibly happen in the future based on external factors you know. This is when understanding the industry standard and how your competitor is doing comes very handy.
Just remember, creating your assumption is really an art than a science. Some of the key assumptions you need to identify are as follows: What would be the growth for customer retention? Do you expect an increase in the number of leads? What about your conversion rate? Do you expect any growth? Do you plan to increase your price?
Is it reasonable to increase transaction frequency per customer? How much investment you need in marketing, human resources, or operation to support the growth rate you are predicting in revenue? What about the percentage increase in variable and fixed costs?
Once you have created your assumption, then you can start making the forecast. That's your step number four. In this step, you basically will combine the information from your debt schedule, your historical financial results, and apply the assumption you have created to get the estimated future financial result.
Once you have completed the forecast, not only you will see if the debt financing can help you grow the top line. But you can also see if the debt financing provides the expected profitability you have in mind. The goal of getting into debt should be for growing your business to the next level, and this should translate into long-term profitability.
Another benefit of having a forecast is for you to have a clear view of future cash flow and determine if your business can really afford the debt repayment and interest payment in the future until the maturity date. One of the key success in growing your business with debt financing is planning. We encourage you to listen to Episode 134 and 135, if you haven't. Then decide if debt financing is the right one for you and your business.
If you are uncertain about the type of debt financing you need, how much debt your business can handle, or how you can create a forecast to include the debt financing repayment, we are here to support you. We understand what you love is to continue expanding your business. You want to focus on building. So let us help you. Connect with us at christinasjahli.com/lets-chat.
And that brings us to the end of another show. Thank you so much for listening to another episode of Her CEO Journey, the business finance podcast for women entrepreneurs. If you want to create a proactive financial plan and process for your business, so you are ready to weather the financial storm over the next few months, let's chat and see what's possible for you. Book in a time to speak with me at christinasjahli.com/lets-chat.