How To Manage Insufficient Capital In Business

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This article shows you how to Manage Insufficient Capital In Business.

  • Review your business capital
  • Fixed asset
  • Current assets
  • Review your inventory
  • Stop credit sales to customers
  • Stock only fast selling products
  • Sell of slow moving items
  • Buy stocks from cheap sources
  • Negotiate with suppliers
  • Do more marketing
  • Collect your cash outside
  • Buy only assets your business needs

Business capital may be defined as money invested to generate more revenue.

Undoubtedly, insufficient Capital is one of the most common causes of business failures.

Beyond that many businesses, especially small businesses like yours, usually have issues with managing insufficient capital.

Even the big companies also have their fair share of the problems associated with managing insufficient capital.

That explains why they sometimes issue more shares to raise funds or borrow money from the bank to meet the needs of their businesses.

This article is, therefore, focusing on actionable steps you can take to manage insufficient capital in your business.

Review Your Startup Capital

In your efforts to manage insufficient capital, you need to review your startup capital.

In other words, you should verify whether or not the money you used to start the business was adequate for the type of business you are doing.

If it was okay, then you need to do some homework, make some changes here and there so that you can move on.

However, if your  startup capital was insufficient, then you can take the following steps to address the problem:

  • Invest more funds from your savings
  • Ask family and friends for soft loans
  • As a last resort, seek funding from your bank.

Most importantly, you should be weary about borrowing money from the bank.

This is because high bank interest charges can wreck your business before your business even has a chance of succeeding.

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Investments in fixed 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.

How much money you invest in fixed assets will largely depend on the nature and size of your business.

For example, if your business involves buying and selling of vehicles for sale, you do not need to invest too much money of your capital in fixed assets.

This is because, in this case, vehicles for sale will be usually classified as stocks under current assets.

So you can allocate 30% of your business capital to fixed assets. And leave the remaining 70% of your business capital for current assets. Then it can work fine.

In other words, you should not tie down all your capital in fixed assets. If you do, you will most certainly have issues with issues, sometimes ending up with negative cash flow balance.

Most importantly, you should be able to allocate your business capital in suitable proportion between fixed assets and current assets.

Investments in current assets

Current Assets, which are also called “circulating capital”, include among others:

  • stocks,
  • debtors
  • work- in- progress,
  • short term investments,
  • Cash in hand
  • balance at bank.

Current Assets are called circulating capital because almost all the items in current assets change in value from time to time, depending on the level of your business activities.

Circulating capital is very important because it is from here you will need money to pay the day to day running expenses of your business.

For example, if you are involved in retail business, you can reserve at least 70% of your capital for current assets.

Thus, 70% of your capital will enable you to buy stocks and meet other operating expenses.

Most importantly, if your current assets are not enough, you will  find it difficult to run your business smoothly.

Review your inventory

You need to review your fixed assets from time to time to identify those fixed assets that:

  • your business do not really use
  • are too old
  • costing you too much money to maintain.

In addition, you can sell off plants that are either too old or your business rarely use.

Furthermore, you can trade-in any fixed assets that your business uses but that are costing you a lot of money to maintain.

Trading-in assets simply means, calling in a vendor to value the asset that , due to their age, are putting holes in your pocket.

Thereafter, he will tell you how much money you need to pay to him so that you can collect a new one.

Alternatively, if your business still needs to services of such asset, you can outsource to outsiders the tasks you were using the assets to perform in your business.

Insufficient capital: Stop Credit Sales To Customers

If you are doing business with insufficient capital, you can stop selling goods on credit to customers.

Selling your goods on credit to customers, 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 [which 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 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 will 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 need.

Sell of 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.

This will help to reduce the pressure on your cash flow.

Buy Products from Cheap Sources

Buying merchandise from cheap sources will greatly help you to sell at competitive prices.

In other words, you can purchase your stocks from manufacturers, importers or large distributors.

Some of them may be able to give you trade or cash discounts, if you have track records with them.

Remember that trade and cash discounts form part of your business even before you sell!

Furthermore, when you are able to compete in the marketplace, you can:

  • get you referrals
  • recommendations from satisfied customers
  • keep old customers
  • attract new customers.

Negotiate terms with suppliers

Another 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 option can depend on your track records of doing business with them.

Alternatively, if suppliers refuse to sell more goods to you because you are owing them, you can negotiate with them reschedule your debts.

When they reschedule your payments, it will be easy for you to pay them in little bits.

This way, you will be able to pay old old debts seamlessly, while still being able to buy and pay for  the ones you are buying now.

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 are owing 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 rate, you will not need funds to  replenish your stocks as they get low.

Most importantly, the more people know your business, the more sales and profits you will make.

Collect your cash outside

Collecting your cash outside will help you to 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 are owing you may probably be the cause of 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 can consider giving them little rewards for any money recovered by them.

Do not allow your business to join the league of failed businesses.

Finally, if you do not want that, you should use the above tips to save your business.

 

Related: 101 Inventory Management: How To Manage Your Business

 

By Samuel Ijenhi

B. Sc. Accounting [University of Benin]

Benin City, Nigeria

info@samuelijenhi.com.ng

 

About Samuel Ijenhi

A graduate in Accounting, University of Benin, Benin City, Edo State, Nigeria.
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