Personal Finance. Money. Investing.

Is Debt Hindering Business Function in Modern Markets

Posted: 28th February 2018 by
Debbie Rose
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By Debbie Rose, General Manager at Universal Card

When this subject is raised especially in today’s economic environment, the answer sways to the yes vote and the obvious; invoicing early and chasing payment should help keep cash flow healthy. Cash flow being king.

Let’s just break this down a little more, as its never that simple, is it?


Financial controls are put into place to track performance and evaluate progress toward the financial goals of the company. Management helps decide how to arrive at those goals; how many people are needed to do this, what salary to pay.

Businesses make decisions in uncertain environments and develop strategies to approach the uncertainties in a structured way. Once these decisions have determined how the company will proceed, financial controls evaluate how well the company is following the strategic plans and how valid the strategic decisions were in the first place. You may be more familiar with three year / five year planning which some organisations build into their business planning and actually spend two to three months to create. This may lead to change and reorganisation which in itself can impact financially, or personally.

Ensuring the right financial controls are in place from the outset allows the organisation to evaluate, in a continually objective and systematic manner, ensuring the daily books balance, for a stable work environment and allowing for a healthy outlook for R&D.

But debt isn’t necessarily down to the business to manage or indeed necessarily totally in its control. Let me explain.

Debt hinders consumer spending, consumer spending hinders businesses! Money is the lifeblood of a business and finance is the nerve centre.

There are three key areas to address in tackling debt:

  • Ensuring the business bank account vs. expenditure remains positive.
  • The employee and their understanding of finances.
  • Markets

Thus, as mentioned earlier - cash is king and having it come into the business at the right time can be make or break.

It’s worth spending a moment to think about the whole cash cycle though, from taking an order to getting paid, and make this as short as possible, because a long cash cycle is expensive. It is important to have a negative cash cycle if possible, which means taking cash from customers upfront. Dell used this concept and moved from a 19-day cash cycle to a negative one, which meant that as it got bigger, it had an increased amount of free cash.

Additionally, given the world of business is mainly conducted by people, in the workplace, employees’ own financial situation plays a massive role in their ability to deliver.

Basic needs must be met or exceeded before an employee can even think of what is next in terms of performance and achievement. The basic needs being paying their mortgage/rent/having a roof over their head, and having food to eat. Without our basic needs being sorted, we can’t even think about doing the rest – the niceties. If our company isn’t making even a small profit then, there is no way we can start investing in the development of a new product. And if we don’t understand our income and outgoings, we won’t be able to handle borrowing money against a repayment plan.

But surprisingly, many young adults step out into the big wide world totally unequipped to deal with the financial burdens they may encounter.

In August 2016, the Money Advice Trust published a report called ‘Borrowed Years’ in which they stated that young people were frequent users of credit cards, overdrafts, and loans from friends and family. Among their findings were:

  • more than a third have a credit card, overdraft, or other non-student loan borrowing, owing an average of nearly £3,000;
  • young women tend to have more credit card debts while young men tend to have larger overdrafts;
  • taking student loans into account, more than two thirds of 18 to 24 year olds have some form of borrowing, with the average student loan balance standing at just over £25,000

Adults financial habits can be established as early as seven years old, therefore financial education needs to start early, and where it isn’t, the employer can look to help bridge this gap for the wellbeing of their employee, and in turn the company and therefore is ability to service its customers.

We live in an age of credit availability, contactless payments, PayPal, balance transfers, interest rates, and who knows what the next round of technology may bring – retina payments perhaps? It’s normal to accumulate debt in your 20s and early 30s because at this age, individuals are ‘expected’ to be renting a property, running a car or paying expensive commuting costs, or alternatively travelling the world, having the latest technologies – this is the ‘do it all’ generation after all. Interestingly millennials may be the first generation to earn less than their parents, with future generations likely to follow suit.

Pre-paid cards are a great way to help. You can only spend the money you put on it, so there’s no way of going overdrawn or running up a debt. It’s like a pay-as-you-go mobile phone - you top it up with money in advance. You use it like any other payment card, in shops or online. Businesses can help employee wellbeing by helping them realise what is critical spend (mortgage/rent) and pay this into their bank account, vs essential spend (food/heating) which can be paid via a prepaid card and once it’s gone, its gone.

Last but not least, market conditions can easily affect your business, and therefore you must always be aware of :

  • A recession or economic downturn. It is important to be alert to possible changes, but be responsive and amend forecasts to avoid potential cash flow problems.
  • Interest and exchange rates - these may affect certain industries more than others and at different times, and foreign exchange rates could affect how easy or profitable it is to do business with another country.
  • Your competitors - both existing ones and new ones, and what their strengths and weaknesses are.
  • New technologies and innovations that could change the market and increase or reduce the demand for your existing product or service.

All in all, yes, debt does of course hinder business functions because without cash flow, the stresses tag at many seams within the organisations. And don’t look at debt in isolation as it’s never as simple as that. We are living in an ever-changing world where technological changes partnered with a generation that aren’t necessarily following in their forefathers footsteps, where divorce rates are up 5.8% since 2015, pay growth is subdued and inflation rises to 3.1% adding to the UK squeeze on cost of living. Businesses can do a lot to help manage debt by thinking broader and utilising the tools, advice and technology to support them.



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