13 Most Effective Ways To Manage Inadequate Capital In Your Business.
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.
It is one of the commonest causes of business failure.
However, below are tips that help you to manage inadequate capital in your business.
Inadequate Startup Capital
If you are struggling to run your business with insufficient capital, you need to review your startup capital.
The first step is to find out if the startup capital was adequate.
If it was okay, then you need to do more homework to make sure that you return your business to profitability.
Researchers have found that even the business owners are themselves responsible for financial problems of their businesses.
Therefore, you need to confirm that you are not even responsible for the financial problems.
Insufficient Capital at beginning
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.
However, if you must borrow from the bank, you need to make sure that you will be able to pay back the principal and interest as agreed.
You should also note banks are not interested in funding businesses that are not doing well.
They always want to protect your their money by making sure that do not give credit to businesses that are not doing well.
Restructure your capital
You need to split your business capital into suitable proportions between Fixed Assets and current assets.
Fixed assets are tools that you use in your business to generate revenue.
Examples include plants and machinery, motor vehicles, office furniture and equipment and so on.
You need to confirm that you have not lumped a large amount of money in fixed assets, leaving little money for current assets.
If you have done that, you should reduce your investments in fixed assets.
To enable you to do this, you can:
- Sell off any fixed assets that your business hardly use.
- Transfer the money to current assets.
This can help you to reduce pressure on your cash flow.
The rule is to let the nature of your business determine how you can allocate your capital to fixed assets and current assets.
The bottom line is that you should leave a reasonable amount of money for current assets.
Insufficient capital: Current assets
Current Assets, which are also called “circulating capital”, include among others:
- Work in progress,
- Short term investments,
- Cash in hand
- Balance at bank.
Current Assets are important because it is from there you need money to pay for the day to day operating expenses of your business.
From there you will also need money to purchase stocks when they get low.
Sell off fixed assets
One of the ways to help you manage insufficient capital is to sell off any plant that your business uses only occasionally.
For example, the task usually performed by such asset can be outsourced to a jobber instead of buying a new one.
Alternatively, you can trade in the old fixed asset to a vendor.
Trading in asset simply means, calling in a vendor to value the asset.
Let the vendor tell you how much additional money you need to pay to enable you collect a new asset.
Finally, if you cannot trade in the asset, you can hire or lease one for a limited time.
Stop Credit Sales
If yo are doing business with insufficient capital, you can stop selling goods on credit to customers.
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. You should sell on cash and carry basis only.
Stock Only Fast Selling Products
Stocking only fast selling items is one of the best ways you can manage insufficient capital in your business.
The following are the benefits 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.
Remember that stocking only fast selling items also means that you must stock quality products.
On a final note, you should not put your money on stock items that your customers will not ready and willing to buy.
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 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 be able to pay old debts seamlessly.
Furthermore, you can 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.
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 small business.
In particular, you should advertise your products on radio, television, church bulletins and magazines.
They are very effective ways of driving sales.
The good part is that some of them are not expensive, e.g. radio adverts.
And beyond that, you will have rapid stock turn over rate.
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.
This is because you will always have cash in hand because customers are always buying from you as soon as you receive supplies.
Most importantly, the more people know your business, the more sales and profits you will make.
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