Small Business Debt Management: 6 Numbers to Track Every Month

The monthly profit and loss statement is the least useful document for managing debt. It measures what the business earned and says very little about when the money leaves, and debt is almost entirely a question of when: the calendar of debits, deposits, due dates and deadlines against which earnings either arrive in time or do not.

Six numbers track that calendar. Each can be computed from bank statements, loan documents and an accounts payable report in less time than a monthly close takes. The examples below use one hypothetical company throughout, a distributor depositing $100,000 a month, so that each figure can be read against the others.

1. Debt Service Coverage Measures Whether Earnings Outrun Payments

Debt service coverage divides operating cash flow by required debt payments. The SBA's SOP 50 10 8, which governs standard 7(a) underwriting, defines operating cash flow as earnings before interest, taxes, depreciation and amortization, defines debt service as the required principal and interest on all business debt, and requires a ratio of at least 1.15 on a historical or projected basis. It is a lender's floor, not a measure of health. It is still the number a lender will compute, so the owner should compute it first.

Suppose the distributor produces $18,000 a month in EBITDA. It pays $4,000 on a term loan, $2,500 on an equipment note, and $450 each business day on a merchant cash advance, which across 21 business days is $9,450. Total debt service is $15,950. The ratio is 18,000 divided by 15,950, about 1.13.

That figure sits under the SBA floor, and it sits there because of the advance. A funder will insist the advance is a purchase of receivables and not a debt (a position that matters in court and not at all to the checking account), and the owner who leaves the daily debit out of the calculation will produce a ratio near 2.8 and a false sense of room.

To reach 1.15 the company needs roughly $343 more in monthly EBITDA or roughly $298 less in monthly debt service. Small numbers, both of them. The point of the exercise is that they are small enough to act on.

2. Debt to Revenue Shows Direction Better Than Level

Add every balance and divide by annual revenue. The distributor owes $96,000 on the term loan, $60,000 on the equipment note and $54,000 remaining on the advance, a total of $210,000 against $1,200,000 of annual deposits, or 17.5 percent.

The ratio behaves like a bathroom scale in a house with sloping floors: consistent from month to month, wrong by the same margin each time, and informative only about the direction of travel. The advance balance includes its fee, and the loan balances exclude future interest, so the total mixes two kinds of dollars. Track the trend and do not argue with the level.

3. The Daily Debit's Share of Deposits Is the Number That Moves Fastest

Fixed debits do not care about the month. At $100,000 of deposits, the $9,450 collected by the advance is 9.45 percent of money in. That understates the burden, because deposits are not profit. If the distributor's gross margin is 30 percent, gross profit is $30,000, and the advance takes 31.5 percent of it before rent, payroll or the other two loans.

In a slow month the arithmetic turns. At $70,000 of deposits the same $9,450 is 13.5 percent of money in and 45 percent of a $21,000 gross profit. Nothing in the contract changed. The burden rose by about four tenths in a single month because revenue fell and the debit did not.

That is what a reconciliation clause, where the agreement contains a real one, is supposed to correct, and the owner cannot request a reconciliation without knowing the percentage the debit represents. Compute it against the specified percentage in the agreement every month, and keep the statements that prove it.

And watch what a second advance does. A hypothetical second funder collecting $300 a day adds $6,300 a month. Combined debits reach $15,750, which at $100,000 of deposits is 15.75 percent of money in and 52.5 percent of gross profit. The debt service coverage from section 1 falls, with the new payments counted, below 1.0, which is to say the business is paying its creditors with money it did not earn that month.

A company can survive a bad ratio for a season. It cannot survive not knowing it has one, or, more precisely, it can, until the week the balance does not cover the debit.

4. Days of Cash on Hand Tells You How Long a Mistake Can Last

Divide cash by average daily outflow. With $48,000 in the bank and $96,000 of monthly outflows, including debt payments, the distributor spends about $3,200 a day and holds about 15 days of cash.

Fifteen days is the length of time a late customer, a returned debit or a disputed invoice can run before something goes unpaid. The number does not say what will fail first. The debt calendar does.

5. Accounts Payable Aging Shows Who Is Financing the Business

When cash is short, vendors become lenders without being asked. Of the distributor's $64,000 in payables, suppose $22,400 is more than 60 days past invoice, 35 percent of the total. A rising share over consecutive months means suppliers are carrying debt that no one negotiated, and suppliers who notice may shorten terms or demand payment on delivery.

6. Payroll Tax Deposits Are a Yes or a No

Before the start of each calendar year an employer must determine whether it deposits on a monthly or semiweekly schedule, and federal tax deposits must be made by electronic funds transfer. The metric is binary: every required deposit made on time, or not.

Withheld employee taxes carry personal exposure for responsible persons under the trust fund recovery penalty, and an employer that later seeks an offer in compromise must be current on required deposits for the current quarter and the prior two. A missed deposit is not a ratio to improve. It is a debt with a different creditor, and that creditor does not settle through negotiation of the ordinary kind.

When the Numbers Turn

In the first week of each month, before the prior month's close is finished, the six figures can be written on a single page. Two consecutive months of decline in the same direction is information worth acting on while the calendar still has room in it.

Delancey Street, a debt relief company and not a law firm, examines that kind of page for owners whose debit share or coverage ratio has already turned, above all where merchant cash advances sit in the debt service. Matters requiring legal judgment go to attorneys independently licensed to give it. An initial conversation with Delancey Street carries no charge and remains confidential. None of the six numbers requires outside help to compute; deciding what to do when they turn sometimes does.