Debt is crucial for business. It helps companies to maintain operations and propel growth plans. It keeps the economic wheels of our nation turning. As such, the government encourages entrepreneurs to take loans – and you can deduct loan interest from your income when preparing tax returns.
But entrepreneurs can make mistakes. For example, such errors could cripple an events business.
A lot has changed in the events industry due to the pandemic. Strict rules on crowd control and venue management and limitations of in-person interactions have pushed leaders in the events industry to reconsider business models. They are also quicker to take out insurance against inherent risks in the special events industry. However, the basic principles of debt management have not changed.
This article highlights some of the debt mistakes that entrepreneurs in the events industry are prone to make. But first, a look at why businesses are likely to make mistakes when they borrow.
The pandemic has permanently changed the events industry
Firms in the events industry were amongst the worst hit by the contagion. A recent article published by the Johnson and Wales University reveals the following economic impacts:
- 96% of event professionals experienced cancellations.
- More than 50% of planners and 73% of suppliers expect a negative economic impact.
- 21% of industry players feel that the economic effects will persist beyond 2023.
But, there is light at the end of the tunnel. Industry leaders envision a new business model – hybrid events. Or events that significantly incorporate technology to enhance virtual interactions.
The refreshed model presents vast opportunities for entrepreneurs. When business opportunity encounters low-cost financing (under the guise of pandemic relief lending support), you could borrow without proper consideration and make mistakes.
If the errors are unchecked, it could cripple your events business. Here’s a look at some of the mistakes and how you can avoid them.
Mistake #1. Securing debt to finance a faulty business model
Many entrepreneurs fall into this trap. If your event business was not profitable before the pandemic, a cash injection in the form of debt cannot fix it. It will only make the problems worse.
If the business could not cover the overhead or not generate enough revenues, you should address the real issue. Examine your pricing, costs, and marketing strategy. The problem is in the margins or sales volumes. When you inject cash into an unprofitable firm, you could cripple the business with endless debt payments. Start by fixing the profitability problem, then consider taking a loan.
Mistake #2. Securing debt while you have a poor business strategy
When you have an excellent strategy, debt helps to boost investment in sales and enhance efficiencies. Debt makes businesses grow. However, investing in activities that would not result in an exponential increase in revenue is a mistake. You could cripple the company.
Do you have a clear (proven) strategy on how debt will result in revenue growth? The strategic activities you intend to spend on will indicate the chances of revenue growth. Vague activities will not generate sufficient revenues to service the debt and you could cripple the business.
How do you avoid this pitfall? Consult extensively before taking debt. Have your strategy thoroughly tested and questioned.
Mistake #3. Borrowing to expand too quickly
The pandemic has transformed the events industry. However, changes in the industry do not mean that your business can suddenly handle excess capacity.
The situation is fast evolving, and demand for events is growing. But that does not mean you should borrow to expand too quickly. Borrowing to expand to bigger office space, purchase sophisticated equipment, hire more staff or roll out new products are examples of forced growth. If not planned correctly, such expenditure could severely affect operations and cripple the business.
Forced growth can lead to cash flow problems which could translate to difficulties in customer service.
To avoid falling into such a spiral, aim for sustained growth. Plan your expansion within the existing revenue levels. Ensure that the business adequately meets overheads and other expenses before expanding.
Mistake #4. Not structuring debt according to the seasonal nature of the business
Events companies do not operate at full throttle all year long. Most firms experience peaks during the holiday season. However, as it was in 2020, the 2021 holiday season is also heavily regulated.
During the winter season, revenues might drop. There might be more cash outflow than inflows. To minimize effects on your cash flow, negotiate and ensure the debt structure reflects the business seasons. You could propose interest-only payments during off-peak months and boost payments during the peak season.
Mistake #5. Inefficient management of tax
As an entrepreneur, taxes should not come to mind only in March or April. If that has been your approach, you’ve probably been overpaying and spending precious time on fire fighting or tying up loose ends.
It is crucial to keep track of your taxes and plan early enough. It helps you reduce your tax bill, take advantage of government incentives on businesses servicing loans, and avoid fines and penalties associated with late or erroneous submissions.
This error reduces your financial capability and affects your ability to service debt. It could cripple the business.
To avoid it, plan for the tax season well in advance. Also, meet with a tax consultant frequently and develop and execute an efficient tax plan.
Crippling debt mistakes – the bottom line
After a devastating year, things are looking up for the events industry. Of course, leaders must reinvent their firms. They must comply with the strict crowd control guidelines and adopt the necessary technology.
Above these changes, business leaders must adhere to financial disciplines to avoid crippling their companies. The mistakes mentioned above are avoidable. Reach out to debt experts and get help to ensure the loan boosts the business.