Mathieu Roy
Licensed Insolvency Trustee and Financial Recovery AdvisorNegative cash flow can be a genuine barrier to business growth. Especially when debt servicing accounts for an excessive proportion of cash outflows. Sometimes, a company has to devote a large part of its income to repaying its debt. When this happens, working capital could plummet, and it can become difficult to avoid cash flow problems.
How Can Too Much Debt Affect Your Business?
There are many common causes of cash flow problems for businesses, including rising interest rates, long payment terms and customer payment delays. These factors can also lead to increased indebtedness.
Accumulating debt can limit a company’s ability to generate the liquidity needed to deliver its product or services. If a significant proportion of income is absorbed by debt servicing, there is less room to cover expenses. In addition, poor cash flow management can also affect a company’s financial situation and cash reserves.
What Is Negative Cash Flow?
Net cash flow represents the difference between cash inflows and outflows over a given period. Both large and small business owners can assess the health of their company based on the type of cash flow available.
Negative cash flow occurs when a company spends more money than it generates. This means that cash outflows (payments for operations, debts, fixed charges, etc.) exceed cash inflows (revenues, sales, financing, etc.).
A positive cash flow indicates that the company’s financial health is good. It shows that the company generates more liquidity than it consumes. Positive cash flow enables the company to grow, invest and meet its financial obligations. Good cash flow management is essential to ensure that the company has the necessary liquidity to cover its obligations.
What Is Debt Servicing?
Debt service or servicing refers to the regular payments a company must make to honour its debts. Debt service includes both interest and repayment on financing activities. These payments may be monthly, quarterly or annual, depending on the terms of the loan contracts.
When debt servicing becomes too high in relation to company revenues, it puts pressure on cash flow. This can lead to negative cash flow or other cash flow issues. Inadequate debt management can also limit the company’s ability to invest in its development.
What Happens if a Company Has Too Much Debt?
Getting into debt is often an inevitable part of running a business. However, when large amounts of debt are maintained over the long term, this can lead to various problems, such as :
Problems with cash flow: Excessive debt servicing can make it difficult to generate positive cash flow. A lack of liquidity prevents the company from covering its day-to-day operating expenses.
Insolvency and bankruptcy: When a company can no longer pay its creditors. Businesses in this situation risk insolvency and may have to file for bankruptcy.
Difficulty obtaining financing: Creditors and investors will be reluctant to finance a company with too much debt. A lack of financing can limit the company’s ability to grow.
Loss of flexibility: The company becomes less able to seize market opportunities or prepare for unforeseen cash requirements.
Possible Solutions to Overindebtedness
Business Proposal
A business proposal is a legal process that enables a company to negotiate directly with its creditors. The trustee represents the company before its creditors to reschedule, reduce or even cancel part of its debts.
This solution offers an alternative to bankruptcy, enabling the company to restructure while continuing to operate. The aim is to restore the company’s solvency without forcing it to liquidate its assets. The proposal is generally accepted if it presents a viable plan for repaying creditors over a set period.
Commercial Bankruptcy
Commercial bankruptcy occurs when a company is unable to turn itself around after having explored solutions such as a business proposal. It represents the last resort for a company declared financially insolvent, which then initiates liquidation proceedings.
This process involves selling off the company’s assets to pay off creditors as much as possible. Bankruptcy marks the end of business activities. It allows debts to be written off, sometimes giving owners a chance to start a new business entity on a sounder footing.
If your company is experiencing negative cash flow due to excessive debt servicing, contact the team at M. Roy & Associés. Our professionals will help you identify potential problems and provide the right solution for your needs. Don’t wait to take action, contact us now for a free consultation with one of our advisors.
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