Debt management can help enterprises improve market competitiveness, expand production scale, obtain financial leverage benefits, maintain appropriate cash flow of enterprises, and reduce losses caused by currency depreciation. According to these, debt management will bring infinite vitality and vitality to enterprises and obtain huge benefits; But at the same time, if the debt of an enterprise is too high, it will affect its operating conditions, increase its operating costs and affect its decision-making.
Advantages of debt management
First of all, debt management can enable enterprises to maintain proper cash flow. The goal of financial management is to ensure that enterprises can maintain the least and most suitable cash flow under normal operation, so that all funds can run at a high speed, realize the greatest initiative of funds and obtain higher returns. After adopting debt management, the enterprise can get a lot of profits and operational cash flow at the same time, which will mean that the repayment pressure of the enterprise is reduced, the reputation is maintained, and the remaining idle funds can be invested in the enterprise operation system to achieve the maximum growth rate of wealth.
Second, debt management can gain leverage. Financial leverage refers to the phenomenon that the fluctuation range of ordinary earnings per share is greater than earnings before interest and tax because of the fixed financing cost under the certain capital structure of enterprises. It can be predicted that the earnings before interest and tax will increase after enterprises borrow debts. That is, due to the increase of profits, the interest on fixed debts to be paid is reduced, which brings additional benefits to enterprises, that is, financial leverage is generated. Therefore, an enterprise can have an appropriate debt ratio in its capital structure. The greater the ratio, the greater its financial leverage and the greater its income.
Third, benefit from inflation. When an enterprise predicts inflation in a certain period in the future according to the environment, it can borrow debts according to the actual situation of the enterprise, which will certainly help the enterprise obtain additional income.
Fourth, maintain the control of the company. In addition to liabilities, enterprises can increase their capital by issuing additional shares or mortgaging fixed assets. If additional shares are issued, it will disperse and weaken the controlling rights and discourse rights of the original shareholders, dilute the original shares, and affect shareholders' control and decision-making of the enterprise; If the mortgaged assets are not handled properly, it will also restrict the long-term development of the company. However, debt management does not affect the original shareholders' control over the enterprise, and creditors cannot interfere with the normal production and operation of the enterprise, which will help the original shareholders to maintain control over the enterprise.
Fifth, the role of tax saving. Debt management can also play the role of tax saving. Because according to the current regulations, the interest on liabilities should be included in the financial expenses of the enterprise and deducted before the enterprise pays the income tax, so for the enterprise, it can pay less income tax, resulting in tax savings, thus increasing the income from equity capital.
Risks of debt management
First of all, it increases the financial risk of enterprises. The financial risk here refers to the risk brought to the enterprise when the enterprise raises funds in debt. As the risk borne by bondholders increases, the interest paid by enterprises will be required to increase accordingly, thus achieving a corresponding balance. In other words, in order to expand the benefits of financial leverage, enterprises will inevitably bring certain financial risks to enterprises. Its main performance may be high debt, even if the situation is relatively good, but because of the high interest payment, the owner's rights and interests to shareholders will be washed away, resulting in less income. In addition, due to their own business problems, enterprises may lose the risk of paying off debts when due, which will inevitably lead to the decline of corporate reputation and seriously restrict the long-term development of enterprises.
Second, excessive debt reduces the refinancing ability of enterprises. When the company's debt is higher than the appropriate proportion, creditors will also think about whether the due income can be paid when lending the debt, and their own income is not proportional to the risks they bear. Therefore, the creditor will put forward some conditions for the debtor, or demand to pay high interest, or not consider lending, for fear that the risk is too great and the loan cannot be recovered at maturity. All these will make it difficult for enterprises to raise funds again, and as a result, their fund-raising ability will be reduced.
Third, increase the operating costs of enterprises. When enterprises choose to operate with high debt, the first thing they will consider is the ultra-high interest rate. If the interest is not repaid at maturity, it will seriously affect the company's reputation. Therefore, enterprises must make strict marketing plans in order to pay the high interest at that time and ensure the company's good reputation. However, it is difficult to accurately predict the market, and competitors may change their marketing strategies. Therefore, enterprises have to spend some expenses beyond the plan to beat competitors and adapt to the changes in market demand, so as to ensure the normal operation of finance and pay high interest. For example: price reduction promotion, advertising and so on. These factors make enterprises increase operating costs.
Fourth, increase the financing cost of enterprises. In an enterprise with excessive debt management, creditors will consider whether the debts they lend will be difficult to recover because of poor management of excessive debt. Therefore, the interest demanded by creditors will definitely be much higher than the interest set by creditors before. At the same time, because the enterprise is over-indebted, if it needs to be indebted again, its financial situation can be imagined. Then, banks or other financial institutions will be in a strong position when talking about agency fees with enterprises, and it is easy to obtain high agency fees. Both of them increase the financing cost of enterprises.