What Is Debt Management and Why Is It So Important?

Debt ManagementA crisis. Bankruptcy. Debts. These are unpleasant words. However, alas, events associated with them regularly occur. If you want to avoid negative consequences in the course of your business, then you should manage your debts and receivables in good quality. To understand the need for debt management, we first determine what debt is. Debt is the presence of financial obligations to be repaid by the debtor in a certain period. Thus, any debt is characterized by the presence of the counterparty (debtor or creditor), the amount of debt, maturity.

Types of Debts and the Main Aim of Their Management

Receivables arise when an enterprise sells its products or goods, or provides services. Receivables are nothing more than a deferment of payment, a company's credit to its counterparty, a debtor. Redemption of receivables is governed by the terms of the contract, the clearer you define the maturity of receivables, the easier it is to manage. Types of receivables are also urgent financial investments of the company, for example, the placement of funds on bank deposits.

Accounts payable - a concept similar to receivables, only in the role of the debtor is your enterprise. The first sign of any debt that is always paid attention to is the amount of the debt. Of course, the debt in the amount of one hundred thousand rubles is more important for the enterprise than the debt of one hundred rubles. The second important sign of debt is its maturity. The debt may be short-term (usually up to 30 days), medium-term (from 30 days to one year), and long-term (more than one year).

Debt ManagementHowever, the key feature of a debt is the quality of the counterparty (debtor or creditor) and the contractual relationship with it. A quality debtor can be considered a counterparty who regularly extinguishes his/her debts in accordance with contractual obligations. So, debt management is a set of measures aimed at the observance by the debtors of contractual obligations, preventing the enterprise from the occurrence of overdue payables.

What Are the Debt Management Measures?

Debt management strategies are:

  • Establishment of high-quality contractual relations with counterparties;
  • Analysis of the financial condition of debtors;
  • Monitoring the maturity of debt;
  • Work with bad debts.

Debt management always begins with the establishment of contractual relations with counterparties that are convenient and beneficial to the enterprise. So, when drafting agreements with debtors, it is necessary to minimize the deadlines for repayment of their debts, to provide for various kinds of sanctions for violation of contractual obligations.