By AAT Comment MembersHow to stay afloat in business20 Sep 2023 With Thames Water drowning in debt, what lessons can be learned?Approximately a quarter of the UK population relies on Thames Water for their water supply. However, the company’s future is uncertain due to a series of operational challenges and an overwhelming debt burden.Don’t dig too deep into debtThe debt troubles began when Thames Water was privatised in 1989, with a significant portion of the debt accumulated during its 11-year ownership by the Australian investment bank, Macquarie. By the time Macquarie sold the company in 2017, the debt had reached £10 billion. With high interest rates in the past year, the debt quickly hit £14 billion. The financial situation is particularly critical as about 10% (£1.4 billion) of the debt is set to mature at the end of this year as a bond comes due.Avoid poor performance and resultant finesThese financial headaches come at a time when the entire industry is facing criticism for performance issues such as sewage dumping, water leaks, hosepipe bans and large payouts to investors and executives, with Thames Water being among the worst offenders.The company was fined £4 million in 2021 for allowing untreated sewage to escape into a river and park. In the same year, it was ordered to pay £11 million for overcharging thousands of customers. In 2017, Thames Water received a record £20.3 million fine for repeated instances of raw sewage flowing into the Thames, just one year after being fined £1 million for a single pollution incident.Earlier this year, Sarah Bentley, the former chief executive of Thames Water, stepped down after less than three years. Her departure came shortly after it was revealed that she would receive pay and perks amounting to £1.6m for the year, nearly double her annual salary. In May, she waived her bonus due to the ongoing issues with sewage outflows and leaky pipes.Maintain sensible capital expenditureGiven the increasing costs of fines and debts, Thames Water’s capital expenditure has suffered, prompting the company to seek additional funds. It disclosed that it is collaborating with shareholders to secure the necessary funds, approximately £1bn, as reported.To date, the company has already received £500m from shareholders, with its largest shareholder being the Ontario Municipal Employees Retirement System, a Canadian pension fund. Other shareholders include China’s sovereign wealth fund and the Universities Superannuation Scheme, the UK’s second-largest private pension fund.The government has confirmed it has “contingency plans” in case Thames Water fails to repay its debts, which could involve temporary public ownership.A crucial lesson here is the importance of capital expenditure in maintaining and upgrading vital infrastructure and equipment for the smooth functioning of a business. Neglecting such investments is a false economy and can lead to spiralling costs.Do what an AAT member would doEnsure that plant, machinery and other vital infrastructure maintenance is adequately funded to prevent bigger costs later on.Avoid taking on too much debt, which can restrict businesses’ ability to invest. AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.