As we mentioned previously, micro and small entrepreneurs are the basis of the economy of any country, here in Mexico, they are the main employer and therefore generators of well-being. However, the failure rate is very high and the two main causes are lack of resources and the over-indebtedness.
Among the current government’s plans to promote economic growth is to open credit for these sectors of economic activity. We already mentioned that one of the requirements is the financial education for entrepreneurs, so that they understand the best practices in the administration of financial resources.
Since the risk of over-indebtedness is very important for micro and small businesses, it is essential to take preventive measures to maintain financial stability, since otherwise the cash flow is no longer enough to pay all the commitments made.
It is important to define the sources of debt that companies have. These are, in order from least to greatest risk and desperation: own capital, family and friends willing to risk their resources in the company, suppliers and financial institutions; In addition, there are irregular sources of financing such as pawn shops and moneylenders, which lend money at interest rates much higher than those of the market and require collateral with values much higher than the amount lent; and the riskiest and most expensive sources that put into business continuity risk such as the salaries of employees who stop paying and taxes, social security and Infonavit contributions, local taxes and other contributions.
In summary, it is important to understand that debt is a financing tool and not additional profits, debts have to be paid sooner or later, and it is very sad that entrepreneurs lose not only the money they invested in the business, but also a good part of their assets due to not controlling debt.
The main measures to prevent over-indebtedness are the following:
1. Prepare a budget for income and disbursements realistic monthly and permanently monitor cash flow. This helps determine a more accurate projection of income and fixed and variable expenses, avoiding expenses that are not essential to the operation.
2. Evaluate the real payment capacity in such a way that, based on the surpluses of the determined cash flow, the administration or the businessman decides the amount of money that he is willing to allocate to the debt and its interests.
In the event that the company already has debts and there are signs of insufficient funds To confront them, it is necessary for the administration or the businessman to take the following measures as soon as possible.
1. Make a list of debts in order by interest rate (from highest to lowest) and prioritize the payment of the most expensive ones until they are exhausted, in addition to approaching creditors before defaulting on payments to renegotiate and obtain extensions in payment terms according to the real cash flow available and seek to replace debts with those that are cheaper and with more accessible payment conditions for the business.
2. Look for additional sources of income to increase cash flows and improve payment capacity.
If applicable, seek training and advice on financing and risk analysis issues to have a better preparation in administration of resources.
