How To Manage Inadequate Capital In Business (Updated)
Inadequate capital is a situation where a business does not have sufficient funds to run its business profitably.
Managing inadequate capital is often difficult for many businesses: both big and small businesses.
It is one of the commonest causes of business failure.
However, below are tips that you can use to manage inadequate capital in your business.
Inadequate Startup Capital
If your startup capital is not sufficient, you will struggle to run your business.
Consequently, you will need to source for more funds to support and prevent your business from failing.
However, if it was okay, then you need to look deeply inwards to find out where you are not doing things you are supposed to do
Researchers have found that business owners are themselves responsible for financial problems of their businesses.
Consequently, if you are not the culprit, you will need to review and upgrade your entire business policies, programs and processes.
Inadequate Capital: funding your business
If your startup capital was insufficient from the beginning, then you can take the following steps to address the problem:
- Inject more funds into the business. Use funds from your savings.
- Ask family and friends for soft loans, preferably non interest bearing loans.
- As a last resort, you can seek funding from your bank.
Borrowing money from bank
Borrowing money from the bank can be quite difficult for many small businesses.
This is because banks are usually afraid to fund new or small businesses for fear of default.
However, if any bank agrees to give you credit facilities, you should make sure that you borrow what you can afford to pay back both the principal and the interest charges.
Furthermore, you should note that the problem with borrowing money from the bank is that you must repay the loan and interest as at when due.
Most important, you should bear in mind that if you refuse, delay or default, the bank can approach the court to seek approval to sell your business assets.
If your business is not a limited liability company, the bank can go ahead to sell your personal property to recover their money.
Restructure your capital
To enable you to manage your inadequate capital in your business, you need to split your business capital into suitable proportions between Fixed Assets and Current assets.
Some businesses require large investments in fixed assets.
Conversely, others require large investments in current assets.
The bottom line is that the nature and size of your business should determine how much money you can allocate to fixed assets and current assets respectively.
Moving forward, if you have so much money locked up in fixed assets, you can:
- Sell off any fixed assets that your business has not used in the past six months.
- Transfer the money to current assets.
This can help you to reduce the pressure of your cash flow.
Lease equipment or outsource jobs
If you have any tasks that cannot be done in house due to lack of experience or equipment, you can:
- Lease the required equipment from outsiders.
- Outsource the task to outsiders to do for you.
- Trade in the asset for a new one
When you want to trade in an asset, get a vendor to value the asset.
The vendor can tell you how much more money you need to pay so that you can collect a new asset.
Inadequate capital: Stop Credit Sales
To enable you to manage your business finances, you should not sell your products to customers on credit.
Selling goods to customers on credit, can affect your business in many ways, including:
- Credit sales will tie down your money with customers
- It will put heavy pressure on your cash flow
- You can end up with bad debts that you may not be able to collect.
- Bad debts reduce your profits
- You will not have cash to replenish stocks when they get low.
Therefore, if a customer asks you for credit sales, politely tell the customer to collect whatever the money in his pocket can buy.
In other words, you should sell your products without cash.
Stock Only Fast Selling Products
Stocking only fast selling items is one of the best ways you can manage inadequate capital in your business.
The following are the advantages of stocking only fast selling products:
- Your rate of stocks turnover will increase
- The faster the rate of your stock turnover the more profits you will make
- There will always be cash in hand to take advantage of sudden business opportunities.
- You will be able to restock when stocks get low
- And you may not have much problem with your cash flow.
- Manufacturers and wholesalers will be willing to allow you time to pay
- Banks and other lenders might be willing to fund your business
- Investors can be interested in partnering with you to do business.
Furthermore, for to succeed with selling only fast lines, you need to:
- Sell only quality products
- Provide excellent customer service
- Carry adequate stocks to avoid stock out.
In other words, you should not put your money on stock items that your customers will not ready and willing to buy.
Inadequate capital: sell off slow selling products
If you have stock items that have remained unsold for a long time in your shop or warehouse, you can do sales promotion to get rid of them.
When you sell them off, you will free up the capital tied up in them.
Use the proceeds from their sale to beef up your working capital.
You can also use such money to purchase more fast selling products.
Buy Products from Cheap Sources
Buying merchandise from cheap sources is a great way to help you sell at competitive prices.
You can purchase your stocks from manufacturers, importers or large distributors or cooperative societies.
Some of them may be able to give you trade or cash discounts, if you have good track records with them.
Remember that trade and cash discounts can form part of your profits even before you sell!
Furthermore, when you are able to compete in the marketplace, you can:
- Get referrals
- Recommendations from satisfied customers
- Keep old customers
- Attract new customers.
Negotiate terms with suppliers
Another smart way you can manage insufficient capital in business is to push for your suppliers to give you 30 days or more to pay for supplies.
However, whether or not you succeed with this approach can depend on your track records of doing business with them.
Alternatively, if suppliers refuse to sell more goods to you because you owe them, you can negotiate with them to reschedule your debts.
When they reschedule your debts, it will be easy for you to pay them in little bits.
This way, you will still be able to pay for your current purchases.
However, for this to work, you need to prove to your suppliers that you are someone they can trust.
Most importantly, you should remember that business is built on trust and connections.
Do not take your business to another vendor or abandon your suppliers because you owe them.
Suppliers expect you to stick with them both in good or bad times.
Inadequate capital: do more marketing
When sales get low, you need to do more marketing.
Doing more marketing and sales promotion are two effective ways to boost sales in your business.
In particular, you should advertise your products on radio, television and social media channels.
They are very effective and inexpensive ways of driving sales.
It has been proved that when you have high stock turnover, you will not need too much funds to replenish your stocks as they get low.
Thus, you will always have cash in hand because customers are always buying from you as soon as you receive supplies.
Collect your cash outside
Collecting your cash outside is a great way to help you manage insufficient capital in business.
If you have money outside with customers, this is the time for you to go after them to collect your money from them.
Those who owe you may, probably, contributed to the problems of insufficient you are having in your business
You can set up a crack team to go on debt recovery drive.
To encourage them, you can consider giving them little rewards for any money recovered by them.
Do not allow your business to join the league of failed businesses.
The shame associated with business failure is better described than experienced.
Finally, if you do not want that, you should use the above tips to save your business.
By Samuel Ijenhi
B. Sc. Accounting [University of Benin]
Benin City, Nigeria