This article shows you the 10 greatest ways lack of working capital affects your small business:
- You could miss business opportunities
- Difficulty in meeting day -to- day expenses
- You cannot make bulk purchases
- Difficulty in paying creditors
- You will miss trade and cash discounts
- Inability to get loans from banks
- Good employees will leave
- Good customers will leave too
- Your business cannot grow
- Suggested Solutions
Working capital simply means the cash or cash equivalents that your business needs to meet the day to day expenses of your business.
It is obtained by deducting current liabilities from current assets. Thus, Current Assets – Current Liabilities = working capital.
This article is, therefore, looking at the various ways lack of working capital affects your small business.
The side effects include the following, among others:
You could miss business opportunities
Lack of working capital can make you miss some good business opportunities.
For example, some vendors pile up stocks for sale during Christmas season.
In the same vein, some companies sometimes do clearance sales of their old stocks.
Others do promos during which they reduce prices of their products.
If you lack working capital, you cannot take advantage of these sudden business opportunities.
Lack of enough working capital can affect your business in the following ways:
- Meeting customer deadlines will be difficult
- Some customers will leave
- Sales and profits will drop
- You cannot get new one customers
- Plus, your business will not grow
Inability to pay business expenses
Lack working capital can make it difficult for you to meet day to day expenses of your business, such as:
- Electricity bill,
- Salaries and wages
- fueling and maintenance of vehicles
- Local running expenses
- Newspapers and magazine,
- Lots more.
The above are just a few of the basic expenses your business will necessarily incur in order to keep your business running smoothly.
You cannot make bulk purchases
Lack of working capital can affect your small business in a number of ways, including:
- You can only buy stocks in small quantities,
- You may have to pay a little more than what big buyers pay for your purchases
- Most times, you may find yourself buying from middlemen
- You cannot compete in the marketplace
- your sales will reduce
- So will your profits
- Your business will not grow
Furthermore, lack of working capital can negatively affect the rate of your stock turnover.
Quick stock turnover is very necessary for your business to grow. The faster your stock turnover the more sales and profits you should make.
Difficulty in paying creditors
Lack of working capital can make it difficult for you to pay your suppliers and other creditors as at when due.
If you are unable to pay your creditors in good time, you are likely to have the following problems:
- Suppliers will not trust you any more
- Your credit rating will drop
- They may ask you to pay cash for every single item of stock you buy.
Beyond that, banks and other business partners will be unwilling to do business with you.
This is because your turnover will be low. And it will not impress lenders.
You will miss trade and cash discounts.
Yet another top disadvantage of lack of working capital in business is that you will not get trade discounts that companies give to their big customers.
Similarly, some companies also give cash discounts to customers who pay their bills before due dates.
Therefore, if you are operating your business without enough working capital, you will miss out from the above incentives.
Inability to obtain Loans
Lack of working capital can stand in the way of obtaining loans from your bank.
This is because when the bank is covering your request for loan or overdraft, it will look at:
- your turnover
- your Profit and Loss Account
- Balance Sheets
Furthermore, the bank will calculate important ratios to enable them make a final decision on your request.
The reason the bank will look at all the above indices is that they want to determine whether or not you will be able to repay both the principal and interest on the loan.
Good Employees May leave
Another side effect of lack of working capital in your small business is that some of your good employees may leave.
They will want to leave when they observe that customers are only coming in few numbers.
Moreover, they will reason that with time you may not be able to pay their salaries as at when due.
Workers need regular salaries to keep their families and to plan for their future.
Furthermore, employees will not have job satisfaction.
Customers will Leave
Another top side effects of lack of working capital is that your good customers will leave. They will take their business to the competitor next door.
Moreover, customers do not like to buy one item from your shop and buy other items from another shop close to your shop.
As much as possible, customers like to go a shop where they will buy all their needs.
Furthermore, customers do not like stock outs. Stock outs waste customers’ time and even cost them money.
For example, if your customers begin to experience stock outs in your shop, they will go to other shops where they can possibly get all their needs in one place.
Your business cannot grow
If you are doing business without working capital, your business will not grow.
The reason is that you will not be able to cover the total costs of running your business. It is only when you are able to cover your operating costs and break-even that you can talk of profits.
Therefore, you can see that lack of working capital can negatively hurt your business. Many businesses have gone under due to lack of working capital.
The following recommendations might help you to reduce the effects of lack of working capital:
- sell off any assets that your business has not used in the last six months.
- Use the money realized from such sales to increase your working capital.
- Avoid expenses that are not adding value to your business.
- You should learn how to manage money
- Sell to your customers on “cash and carry” basis only
- Collect your money from debtors
- Increase Revenue and reduce expenses
- Buy only fast selling products
- Upgrade your customer service
- Do more advertising and sales promotions
- Treat your workers well
You can ask your family, friends and associates for short term soft loans to enable you navigate your business out of trouble.
Finally, you should not be shy to seek advice from your mentor or other people who have been there before you.
It is not possible that you know everything. Therefore, ask questions and get answers.
You should also feel free to seek advice from a financial consultants. Parting with a few dollars to get helpful advice may not be a bad idea.
CEO of Ijenhi Business Solutions