The major risk of debt is how the companys debt structure impacts cash flow? Many times a CFO will go into a company to find that they have a credit line to which they acquired during difficult times in the hope that business will come back. On those occasions the business owner got an unsecured credit line up to the maximum amount the bank or lending institution would offer. That is not the way to acquire credit. If you are going to acquire additional credit during a downturn in business you should borrow no more than 70% of accounts receivable and 50% of the cost value of inventory. If the debt you already have on the books already meets or exceeds those criteria then you will be at tremendous risk if you continue to borrow. In these situations look to cut expenses or see if vendors will extend additional credit. The part time CFO should provide debt management and debt acquisition services. This is an important CFO Service and CFO duty. A calculation to make with regards to debt is how many times does Income before Interest and Taxes (EBIT) cover interest expense. EBIT should cover interest expense be anywhere from 6 to 8 times, however different industries have different criteria.
The other risk of debt is personal liability. Virtually all bank debt and credit card debt has personal liability along with it. Another item the CFO should note is whether any of the companys debt is in technical default. A loan may not be in payment default, but it is good to know if a loan is in technical default. A loan is in technical default when a loan violates a covenant or a provision in the loan with the exception of non payment. If non payment provisions are violated then the loan is in payment default. Another CFO service is to identify if any loans or notes are due in the short term. It goes without saying that debt is a risk, it obviously can be major cause of Cash Flow Problems.