How To Manage Insufficient Capital In Business

 

 

 

 

This article shows you how to manage insufficient capital in business:

  • Review your startup capital
  • Stop credit sales to customers
  • Buy only fast selling products
  • Buy stocks from cheap sources
  • Ask your suppliers for 30 days to pay
  • Sell all idle assets
  • Do more marketing
  • Collect your debts outside

Review Your Startup Capital

If you are you facing the problem of insufficient capital in business, do not worry so much because you are not alone. Insufficient capital or lack of capital in business is one of the leading causes of business failure.

First of all, you need to find out whether you started your business with enough capital. Secondly, you should review how you split your startup capital between fixed assets and current assets.

For example, if your spent a lot of your startup capital on capital equipment such as cars, furniture and fittings and left only a little amount of money as current assets, you should get the problem of insufficient working capital.

Fixed Assets and Current Assets Allocation

How you split your capital between capital equipment and current assets can have   serious impacts on your ability to cope with working capital in business.

In retail trade, for example, if you set aside say 30% of your capital for fixed assets and 70% for current assets, it should work out fine.

On the other hand, if you are selling motor vehicles, for instance, the above arrangement will not work. This is because new vehicles for sale should be classified as stocks and stocks of new vehicles for sale should require a lot of capital.

Stop Credit Sales To Customers

You should stop selling goods on credit to customers.  Let all customers pay cash for whatever they want to buy.  If a customer asks you for credit sales, politely tell the customer to collect whatever the money in his pocket can buy. There are many disadvantages in selling goods on credit. Related: How To Manage Insufficient Capital In Business

Firstly selling goods on credit is a major cause of small business failure. It kills small businesses faster than you can imagine.

Secondly, it will tie down your capital with customers out there. Thirdly, it will put heavy pressure on your cash flow, thereby causing the problem of lack of enough working capital in your business.

Furthermore, while some of your customers may not pay you as at when due, the dishonest ones might just avoid your shop and begin to buy their needs from other shops far away from you.

Most importantly, selling good on credit will lead to the problem of bad debts; that is, debts you will not be able to collect.

Consequently, you will end up having large amounts of money in the form of bad debts. Bad debts are usually written off to the profit and loss account at the end of the year. Bad debts reduce your profits.

Stock Only Fast Selling Products

Stocking only fast selling items is one of the best ways you can manage insufficient capital in business.

In order words, you should not put your money on stock items that your customers do not need.

If you stock only fast selling items, it should help your business in the following ways:

  • You will be getting quick stock turnover, which is the number of times each stock item in your shop is bought and replaced
  • The faster the rate of your stock turnover the more sales and profits you should make.
  • You will always have cash in hand to purchase stocks which your customers need.
  • If you have a fast stock turnover, suppliers will be willing to supply you stock even without paying cash on the spot.
  • Manufacturers and wholesalers should see your business as a very good channel through which they should distribute goods.
  • Banks and other lenders should be willing to fund your business because of your turnover.
  • Investors will be interested in partnering with you to do business
  • Customers should see your business as the place they can always get what they need.

To enable you manage insufficient capital in business, you should aim at quality stock items,quick stock turnover, affordable prices supported by an effective and efficient customer service.

In order words, if you put your money on stocks that nobody needs, you will always remain in the web of insufficient capital.

Buy Products From Cheap Sources

To enable you to manage insufficient capital in business, you should purchase your stocks from very cheap sources, preferably from manufacturers, importers or whole sellers.

Furthermore, if you buy stocks from cheap sources, you should be able to sell at cheap prices too.

Your sales and profits should improve because you should be able to keep your existing customers and get new ones.

Ask Your Suppliers For 30-60 Days To Pay

Another way you can manage insufficient capital in business is to press your debtors to pay early while you ask your suppliers to extend payment period for you to pay for goods they supplied to you. Whether or not you succeed with this option should depend on your past records of doing business with them.

Alternatively, if you are owing suppliers as a result of which they no longer want to sell to you on credit terms, you can negotiate with your suppliers to reschedule or spread the payment terms so that you can continue to buy from them again.

However, for this to work, you need to prove to your suppliers that you are someone they can still do business with. Their decision should be based on your past records of doing business with them. Remember that business is built on trust and connection.

Furthermore, you should not restrict yourself to buying from one sources. Look for suppliers who should give you both trade and cash discounts. However to qualify for cash discounts, you should be able to pay your bills before due dates.

Sell All Idle Assets

You should sell any assets such as old vehicles or plants that are not bringing cash into your business. Any assets that your business has not used in the last six months should be sold off. Use the money to boost your working capital.

However, if your business still need any of the assets that are sucking your cash, you should consider leasing instead of outright purchase of new ones. This should save you maintenance costs.

Alternatively, you can trade-in some of the assets with a vendor. The vendor will value your asset and ask you to pay additional xyz amount and collect a new asset.

Do More Marketing

When sales get low, you need to do more marketing. Doing more marketing and sales promotion are two useful ways you can get your business out of the problem of insufficient capital in business.

You should advertise your business and your products on radio and television. The more you advertise, the more potential customers will get to know your business. And chances are that you will make more sales and profits.

Your Debts Outside

If you have money outside with customers, this is the time for you to go after them.  You have to do this because they were part of the problem that caused insufficient capital in your business in the first place.

You can set up a crack team to go on debt recovery drive. To encourage them, you should consider giving them little rewards for any money recovered by them.

In conclusion, you should remember that credit sales kill small businesses faster than anything you can imagine. It has caused many otherwise profitable businesses to fail. You do not want your business to join the league of failed businesses. If you do not want that, you should follow the above tips.

 

By Samuel Ijenhi

samuelijenhi@gmail.com

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