This article shows the 9 side effects of insufficient working capital in your small business:
- Missed business opportunities
- Inability to meet day to day expenses
- Buy stocks in little quantities
- Inability to pay creditors
- Lost trade discounts
- Missed cash discounts
- Inability to access funding
- Loss of integrity
- Good employees leave
- Customers leave you
1. Missed Business Opportunities
One of the major side effects of insufficient working capital is that you cannot take advantage of sudden business opportunities.
For example, government sometimes makes legislations that create business opportunities that you never thought of before.
Another example could be when you decide to relocate your business to a better place where demands for your products are higher.
But if you are struggling with insufficient working capital, you will not be able to make use of these opportunities.
Consequently, your competitors with good working capital will simply use the opportunities to take over your customers.
2. Insufficient working capital: Inability To Meet Day To Day Expenses
Yet another side effect of insufficient working capital is that you will not be able to meet the day-to-day running costs of your business.
For example, you might not be able to pay for your business expenses such as salaries and wages, rents, lighting, fuelling and maintenance of business vehicles.
For example, if you are unable to pay staff salaries as at when due, you cannot expect to enjoy their loyalty and dedication. Some of them might eventually steal your cash or stocks.
3. Insufficient working capital: Inability To Purchase Stocks
Still another side effect of insufficient working capital is that:
- You will be unable to buy stocks in large quantities.
- As you buy only in little quantities, you are most likely to pay a little higher than what major dealers pay for the same product.
- Some products sell more at certain seasons of the year. Example would be Christmas season.
- If you do not have enough working capital you cannot stock up for the season.
- Because you buy at higher prices, you cannot sell at cheap prices.
- Consequently, your customers will look elsewhere to purchase their needs.
Therefore, you should always make sure that you have enough working capital so that you can keep your existing customers and acquire new ones.
4. Inability To Pay Creditors
Insufficient working capital will make it difficult, if not impossible, for you to pay suppliers as at when due.
Consequently, if you are in the habit of not paying suppliers in good time, suppliers will not be willing to sell to you on credit terms.
This is because they will afraid that you might not be able to pay for the supplies.
Therefore, you need enough working capital to enable your business to run smoothly.
5. Insufficient Working Capital: Loss Of Discounts
If you are having problems with insufficient working capital, you will not be able to get trade discounts which big companies give to their major customers.
Some companies offer cash discounts to encourage customers to pay their bills before due dates.
Do not forget that big companies prefer to sell major customers than small buyers because it is more economical for them to do so.
In other words, it saves time and other resources on documentation and other business processes.
6. Insufficient Working Capital: Inability To Access Funding
If lenders know that you have insufficient working capital, you might not be able to access funding from them.
Their excuse might be that you may not be able to pay them back both the capital and the interest.
However, some lenders might come to your rescue. Often time, whether or not you able to get funding from them will depend on your track records with them.
7. Insufficient Working Capital: Loss Of Integrity
You might lose your integrity if you have problems with working capital. Suppliers and other business partners will begin to doubt your integrity.
For instance, they will believe that you might be able to keep your promises to do what you say you will do.
In other words, your business partners will not trust you. Remember that business is built on trust and connections.
8. Loss Of Good Employees
Insufficient working capital can make your good employees to leave. Because they are not sure that they could keep their jobs, they will like to look elsewhere for better jobs.
9. Insufficient Working Capital: Loss Of Customers
Insufficient working capital will make you to lose your existing customers and you will not be able to acquire new ones.
Losing customers at a time when customers are difficult to come by can be a painful experience.
Therefore, you need to provide enough working capital to prevent your business from shutting down.
- You should review the startup capital of your business.
- You should sell off assets that are not generating revenue for your business.
- In particular, you should sell any asset that your business has not used in the last six months.
- Use the money realized from the sale of the fixed assets to boost your working capital.
- Allocate say 30% of your startup capital to fixed assets and keep the remaining 70% for current assets.
- In some businesses, 50% allocation for current assets and 50% for current assets might just work out fine.
- Reduce some of your business expenses.
- Keep only expenses the business needs to run smoothly
- Weed out expenses that are not adding value to your business.
- You should develop financial discipline that should enable you to operate your business on low budget.
The above suggestions are not all that you can get. Therefore, you should ask your mentor to help you with more useful advice. You can also consult business management professionals to help you out. Related: How To Manage Small Business Finances Efficiently
CEO of Ijenhi Business Solutions
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