What are the best ways to measure the success of your small business's debt financing budget?

2 Debt Service Coverage Ratio

Another key metric to measure your debt financing budget is the debt service coverage ratio, which measures how well you can pay off your debt obligations with your cash flow. Cash flow is the amount of money that flows in and out of your business from your operations, investments, and financing activities. The debt service coverage ratio shows how many times your cash flow can cover your debt payments, such as interest and principal, over a period of time. A high debt service coverage ratio means that you have enough cash flow to pay off your debt comfortably, which can improve your creditworthiness and reduce your default risk. A low debt service coverage ratio means that you are struggling to meet your debt payments, which can harm your credit rating and increase your financial stress. Therefore, you should aim for a debt service coverage ratio that is above 1, which means that your cash flow exceeds your debt payments, and preferably above 1.5, which means that you have some buffer in case of unexpected expenses or revenue fluctuations.

3 Return on Debt

A third way to measure your debt financing budget is the return on debt, which measures how much income you generate from your debt. Income is the amount of money that you earn from your sales, services, or other sources, before deducting your expenses. The return on debt shows how efficiently you use your borrowed funds to create income for your business. A high return on debt means that you are earning more income than the cost of your debt, which can increase your profitability and growth potential. A low return on debt means that you are earning less income than the cost of your debt, which can decrease your profitability and growth potential. Therefore, you should aim for a return on debt that is higher than your interest rate, which means that you are making a positive net return from your debt financing.

4 Debt Financing Strategy

The final way to measure your debt financing budget is to evaluate your debt financing strategy, which is the plan that you have for using your debt to achieve your business objectives. Your debt financing strategy should consider factors such as the amount, type, term, and source of your debt, as well as the timing, purpose, and repayment of your debt. Your debt financing strategy should also align with your business model, cash flow cycle, risk tolerance, and growth stage. A good debt financing strategy means that you have a clear and realistic vision of how your debt will help you grow your business, improve your cash flow, and increase your value. A poor debt financing strategy means that you have a vague and unrealistic vision of how your debt will affect your business, or that you have no vision at all. Therefore, you should review your debt financing strategy regularly and adjust it as needed to match your changing needs and opportunities.