{"id":96199,"date":"2025-11-27T15:29:57","date_gmt":"2025-11-27T20:29:57","guid":{"rendered":""},"modified":"2025-11-27T15:29:58","modified_gmt":"2025-11-27T20:29:58","slug":"6-steps-to-smarter-debt-management","status":"publish","type":"rbc_my_money_matter","link":"https:\/\/www.rbcroyalbank.com\/en-ca\/my-money-matters\/business\/managing-your-business\/business-financing-and-funding\/6-steps-to-smarter-debt-management\/","title":{"rendered":"6 Steps to Smarter Debt Management: What Business Owners Need to Know"},"content":{"rendered":"\n<section class=\"wp-block-rbc-section-block  pos-rel\" style=\"border-radius:0px\">\n<div class=\"wp-block-rbc-section-inner-block  section-inner\" style=\"border-radius:0x\">\n<div class=\"wp-block-rbc-rbc-block drop-shadow pos-rel top-line-blue block-wpr\">\n<div class=\"wp-block-rbc-rbc-block-inner-block block-inner\">\n<h4 class=\"wp-block-heading\" id=\"h-tldr\">TLDR<\/h4>\n\n\n\n<ul class=\"wp-block-rbc-list is-style-blue-disc\">\n<li class=\"wp-block-rbc-list-item\">\n<p>Debt can be a useful tool for your business. When managed strategically, it can help you grow, invest and stay agile<\/p>\n<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-rbc-list is-style-blue-disc\">\n<li class=\"wp-block-rbc-list-item\">\n<p>Understanding the status of your debt and cash flow can help you manage them with confidence<\/p>\n<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-rbc-list is-style-blue-disc\">\n<li class=\"wp-block-rbc-list-item\">\n<p>A proactive approach can go a long way. Regularly review and restructure before debt becomes a problem<\/p>\n<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-rbc-list is-style-blue-disc\">\n<li class=\"wp-block-rbc-list-item\">\n<p>Aligning borrowing with your goals and reducing high-cost loans can help you rebuild financial strength for the future<\/p>\n<\/li>\n<\/ul>\n<\/div>\n<\/div>\n\n\n\n<p><\/p>\n\n\n\n<p>Debt can be a powerful growth tool when it\u2019s managed wisely. When paired with a clear understanding of cash flow, operational needs and strategic goals, it can help you grow, invest and seize opportunities. Unmanaged debt, on the other hand, can do the opposite \u2013 strain cash flow, limit flexibility and slow growth.<\/p>\n\n\n\n<p>Finding the right balance isn\u2019t easy, but these six steps \u2013 the 6Rs \u2013 can help you get there. They\u2019ll help you understand your true debt position, manage borrowing effectively and spot early warning signs before debt becomes a problem.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-review-know-where-you-really-stand-with-your-debt\">Review: Know where you really stand with your debt<\/h2>\n\n\n\n<p>Before you can manage debt, you need a clear picture of what you owe. Start by making a complete list of your loans, lines of credit, credit cards and payment terms. Note which debts are high-interest, variable-rate or coming due soon.<\/p>\n\n\n\n<p>Once you\u2019ve gathered the basics, dig deeper with a few simple ratios. These numbers can help you see your financial position the same way a lender would.<\/p>\n\n\n\n<p><strong>Debt Ratio<\/strong><\/p>\n\n\n\n<p>Shows the percentage of your business\u2019s assets financed by creditors. It\u2019s a ratio to determine whether your debt level is reasonable relative to your assets.<\/p>\n\n\n\n<p><strong>+\/- How to calculate Debt Ratio:<\/strong><\/p>\n\n\n\n<p>Divide your total debt by your total assets. A good Debt Ratio largely depends on your industry, but anything below 0.3 is considered fair.<\/p>\n\n\n\n<p><strong>Debt Service Coverage Ratio (DSCR)<\/strong><\/p>\n\n\n\n<p>Shows your ability to repay loans, take on new financing and make dividend payments. Different debt providers may have different target numbers; however, the greater the value over 1.25 (125% coverage), the better.<\/p>\n\n\n\n<p><strong>+\/- How to calculate Debt Service Ratio:<\/strong><\/p>\n\n\n\n<p>Divide net operating income by debt service, which is the sum of all current debts, including principal and interest.<\/p>\n\n\n\n<p><strong>Current Ratio<\/strong><\/p>\n\n\n\n<p>Also called Working Capital Ratio, this calculation indicates whether your business has enough cash flow to meet its short-term obligations. It can also help you avoid cash flow problems before they surface.<\/p>\n\n\n\n<p><strong>+\/- How to calculate Current Ratio:&nbsp;<\/strong><\/p>\n\n\n\n<p>Divide your current assets by your current liabilities. Ideally, your Current Ratio should fall between 1.5 and 2 \u2014 a ratio of 1 means you may not have enough money to last the year, while a ratio of more than 2 could mean you\u2019re not investing enough into your business for the future.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-reassess-understand-your-cash-flow\">Reassess: Understand your cash flow<\/h2>\n\n\n\n<p>Next, take a closer look at how cash flows through your business. Even profitable companies can run into trouble if cash comes in slower than it goes out, making debt repayment commitments harder to meet. In today\u2019s economy, that may be more challenging.<\/p>\n\n\n\n<p><a href=\"https:\/\/www.rbcroyalbank.com\/business\/paying-and-receiving\/business-cash-flow-tool.html\" data-dig-id=\"LP-96199-1426c4a0\" data-dig-label=\"Cash Flow calculator\" data-dig-action=\"link click\" data-dig-category=\"LP\" class=\"rbc-link-format\">Cash Flow calculator<\/a><\/p>\n\n\n\n<p>A helpful tool here is the Cash Conversion Cycle (CCC). It shows how long it takes for money spent on products to return as cash from sales.<\/p>\n\n\n\n<p>The formula looks like this:<\/p>\n\n\n\n<p><strong>CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) \u2013 Days Payable Outstanding (DPO).<\/strong><\/p>\n\n\n\n<p>Here\u2019s how a Canadian business can use CCC to understand its cash flow:<\/p>\n\n\n\n<div class=\"wp-block-rbc-callout-block section-inner callout-block campaign\"><div class=\"callout  horizontal\"><div class=\"callout-content\"><div class=\"callout-copy\">\n<p>A mid-sized furniture retailer imports home furnishings and sells them to both consumers and wholesale buyers. Recently, the owner noticed that despite strong sales, the business\u2019s bank balance is often tight, making it hard to pay suppliers on time or invest in growth. They decide to calculate their cash conversion cycle:<\/p>\n\n\n\n<ul class=\"wp-block-rbc-list is-style-blue-disc mar-l mob-mar-l\">\n<li class=\"wp-block-rbc-list-item\">\n<p>Days Inventory Outstanding (DIO): On average, the product sits in the warehouse for 80 days before being sold<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p>Days Sales Outstanding (DSO): Customers, especially wholesale buyers, take roughly 60 days to pay invoices.<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p>Days Payables Outstanding (DPO): The business pays suppliers in 30 days.<\/p>\n<\/li>\n<\/ul>\n\n\n\n<p>CCC: 80 + 60 \u2013 30 = 110 days<\/p>\n<\/div><\/div><\/div><\/div>\n\n\n\n<p>This means it takes 110 days \u2013 almost four months \u2013 for cash paid out to suppliers to return as cash from sales. Needless to say, it\u2019s a major strain on liquidity.<\/p>\n\n\n\n<p>By calculating CCC, the owner can pinpoint the problem: slow-moving inventory, late payments and supplier terms that don\u2019t align with cash flow.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-restructure-strengthen-your-cash-and-debt-position\">Restructure: Strengthen your cash and debt position<\/h2>\n\n\n\n<p>Once you understand the pressure points, you can take action to improve both cash flow and the debt structure.<\/p>\n\n\n\n<p><strong>Restructure cash flow<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-rbc-list is-style-blue-disc mar-l mob-mar-l\">\n<li class=\"wp-block-rbc-list-item\">\n<p><strong>Encourage faster payments<\/strong>: Offer a 2% discount to customers who pay within 10 days instead of 60.<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p><strong>Move inventory faster<\/strong>: Introduce promotions or bundle slow-moving products to reduce inventory delays. In the furniture retailer example, this could involve bundling living room sets (i.e., sofa, rug and coffee table) to reduce the average days in inventory from 60 to 45.<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p><strong>Negotiate better terms with suppliers<\/strong>: Ask suppliers to extend payment terms from 30 to 45 days to align with customer payment timelines.<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p><strong>Engage in scenario planning<\/strong>: Stress-test cash flow against cost increases. For instance, consider what might happen if costs rise 10% but the amount you charge customers remains flat.<\/p>\n<\/li>\n<\/ul>\n\n\n\n<div class=\"wp-block-rbc-callout-block section-inner callout-block campaign\"><div class=\"callout  horizontal\"><div class=\"callout-content\"><div class=\"callout-copy\">\n<p>In the furniture store example, making these adjustments reduced their CCC from 110 days to 60, freeing up nearly 50 days\u2019 worth of cash flow.<\/p>\n\n\n\n<ul class=\"wp-block-rbc-list is-style-blue-disc mar-l mob-mar-l\">\n<li class=\"wp-block-rbc-list-item\">\n<p>Days Inventory Outstanding (DIO) improves from 80 days to 60 days<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p>Days Sales Outstanding (DSO) improves from 60 to 45 days<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p>Days Payable Outstanding (DPO) improves from 30 to 45 days<\/p>\n<\/li>\n<\/ul>\n\n\n\n<p>New CCC: 60 + 45 \u2013 45 = 60<\/p>\n\n\n\n<p>The cash gap is reduced from 110 days to 60 days, freeing up 50 days of liquidity and making it easier to pay suppliers and reinvest in growth.<\/p>\n<\/div><\/div><\/div><\/div>\n\n\n\n<p><strong>Restructure debt<\/strong><\/p>\n\n\n\n<p>Debt management works best when it\u2019s proactive, not reactive. Here\u2019s what you can talk to your lenders about:<\/p>\n\n\n\n<ul class=\"wp-block-rbc-list is-style-blue-disc mar-l mob-mar-l\">\n<li class=\"wp-block-rbc-list-item\">\n<p>Refinancing high-interest debt<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p>Extending amortization to lower monthly payments<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p>Consolidating loans into a single, lower-rate solution<\/p>\n<\/li>\n<\/ul>\n\n\n\n<p>These steps can help protect cash flow, avoid last-minute decisions and give your business more flexibility to navigate changing market conditions.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-reduce-cut-excess-debt\">Reduce: Cut excess debt<\/h2>\n\n\n\n<p>Once you\u2019ve mapped your overall position, look for ways to lighten your load. Paying down high-cost loans or using proceeds from idle assets can strengthen your financial base.<\/p>\n\n\n\n<p>At the same time, review operating costs and inventory levels to find extra cash. Reducing expensive debt improves liquidity and lowers risk \u2014 and combined with CCC tracking (if relevant for your business), it helps identify where your money might be tied up unnecessarily.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-rebalance-align-borrowing-with-your-business-goals\">Rebalance: Align borrowing with your business goals<\/h2>\n\n\n\n<p>Not all debt is bad, but it should fit your strategy \u2014 and it\u2019s important to match the type of borrowing to its purpose. Here are some best practices:<\/p>\n\n\n\n<ul class=\"wp-block-rbc-list is-style-blue-disc mar-l mob-mar-l\">\n<li class=\"wp-block-rbc-list-item\">\n<p>Short-term credit for working capital<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p>Term loans for equipment or long-term assets<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p>Revolving credit for seasonal needs<\/p>\n<\/li>\n<\/ul>\n\n\n\n<p>Avoid using long-term borrowing to cover short-term expenses \u2014 it\u2019s costly and limits flexibility.<\/p>\n\n\n\n<p>Also, align loan terms with asset life. For example, if a piece of equipment has a five-year life, it\u2019s unwise to take on a seven-year loan \u2014 you could end up paying for it long after it\u2019s out of use. And maintaining a healthy debt-to-equity ratio means you can be ready to borrow again when the next opportunity surfaces.<\/p>\n\n\n\n<p><a href=\"https:\/\/www.rbcroyalbank.com\/en-ca\/my-money-matters\/business\/managing-your-business\/business-financing-and-funding\/lease-loan-or-cash-5-things-to-consider-when-acquiring-new-equipment-for-your-business\/?msockid=23e6bb9336266c030833ae74378c6dc9\" data-dig-id=\"LP-96199-64f866f8\" data-dig-category=\"LP\" data-dig-action=\"link click\" data-dig-label=\"Lease, Loan or Cash? 5 Things to Consider When Acquiring New Equipment for your Business - My Money Matters\" class=\"rbc-link-format\">Lease, Loan or Cash? 5 Things to Consider When Acquiring New Equipment for your Business &#8211; My Money Matters<\/a><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-rebuild-prepare-for-the-next-cycle\">Rebuild: Prepare for the next cycle<\/h2>\n\n\n\n<p>Once your business is stable, shift your focus to building resilience. Rebuild cash reserves, improve profit margins and maintain strong credit relationships with lenders.<\/p>\n\n\n\n<p>While it might be tempting to pay down every loan when profits rise, doing so too quickly can leave you short on working capital. Instead, find a healthy balance between repaying debt and reinvesting for growth.<\/p>\n\n\n\n<p>When evaluating new borrowing, ensure the return on investment (ROI) exceeds the cost of debt, not just in the short term but over the life of the asset or investment. Monitoring your key debt and cash flow ratios can help you stay ahead of issues and keep debt working for you, not against you.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-bottom-line\">Bottom Line<\/h2>\n\n\n\n<p>Debt can be a strategic advantage \u2014 but only if you know your numbers, act proactively and match your borrowing with your business goals.<\/p>\n\n\n\n<p>By following the 6Rs \u2014 Review, Reassess, Restructure, Reduce, Rebalance and Rebuild \u2014 you can make smarter financial decisions, maintain flexibility and position your business for long-term growth.<\/p>\n\n\n\n<p>RBC Advisors can help you assess your cash flow, optimize your debt and spot early warning signs before small issues become big ones.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<div class=\"wp-block-rbc-rbc-default-collapsible\"><p><button class=\"collapse-toggle collapsed\" data-target=\"#collapse834a1009\" data-toggle=\"collapse\" aria-expanded=\"false\" aria-controls=\"collapse834a1009\" data-dig-id=\"LP-57738-834a1009\" data-dig-category=\"LP\" data-dig-action=\"accordion closed\" action-closed=\"accordion closed\" action-opened=\"accordion open\" data-dig-label=\"Things our lawyers want you to know\"><span>Things our lawyers want you to know<\/span><span>Things our lawyers want you to know<\/span><\/button><\/p><div class=\"collapse-content collapse\" id=\"collapse834a1009\">\n<div class=\"wp-block-rbc-collapsible-inner-block collapse-inner\">\n<p>This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.<\/p>\n<\/div>\n<\/div><\/div>\n<\/div>\n<\/section>\n","protected":false},"excerpt":{"rendered":"<p>Debt can be an effective tool for managing and growing your business, but only when managed wisely. Discover the 6Rs of managing business debt.<\/p>\n","protected":false},"author":319,"featured_media":96200,"parent":57332,"menu_order":0,"template":"wp-custom-template-mmm-sticky-nav","meta":{"_acf_changed":false,"advgb_blocks_editor_width":"","advgb_blocks_columns_visual_guide":"","footnotes":""},"tags":[574],"rbc_content_type":[31],"rbc_audience":[110],"rbc_lob_group":[35],"rbc_difficulty_level":[33],"rbc_mmm_category":[305,385,302,327,324,306],"class_list":["post-96199","rbc_my_money_matter","type-rbc_my_money_matter","status-publish","has-post-thumbnail","hentry","tag-commercial-insights","rbc_content_type-article","rbc_audience-business-owners","rbc_lob_group-business","rbc_difficulty_level-beginner","rbc_mmm_category-business","rbc_mmm_category-business-financing-and-funding","rbc_mmm_category-debt-stress-relief","rbc_mmm_category-managing-and-consolidating-debt","rbc_mmm_category-managing-your-business","rbc_mmm_category-struggling-to-make-ends-meet"],"acf":{"contently_publication_id":"","custom_author":"Diane Amato","rbc_video_header":"","rbc_media_duration":"","rbc_toc_for_mmm_tag":"h2","rbc_toc_for_mmm_limit":6,"rbc_toc_for_mmm":[{"title":"Review: Know where you really stand with your debt","url":"#h-review-know-where-you-really-stand-with-your-debt"},{"title":"Reassess: Understand your cash flow","url":"#h-reassess-understand-your-cash-flow"},{"title":"Restructure: Strengthen your cash and debt position","url":"#h-restructure-strengthen-your-cash-and-debt-position"},{"title":"Reduce: Cut excess debt","url":"#h-reduce-cut-excess-debt"},{"title":"Rebalance: Align borrowing with your business goals","url":"#h-rebalance-align-borrowing-with-your-business-goals"},{"title":"Rebuild: Prepare for the next cycle","url":"#h-rebuild-prepare-for-the-next-cycle"}],"rbc_toc_for_mmm_action":"Generate Table Of Contents"},"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.7 (Yoast SEO v26.8) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<meta name=\"description\" content=\"Debt can be an effective tool for managing and growing your business, but only when managed wisely. 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