The following are the 9 Most Effective Ways To Manage Insufficient Capital In Your Business
- Review your business capital
- Stop credit sales to customers
- Buy only fast selling products
- Buy stocks from cheap sources
- Ask your suppliers for 30 days to pay
- Sell all idle assets
- Do more marketing
- Collect your debts outside
Insufficient capital is often one of the commonest causes of business failure.
If you have this problem, do not worry too much.
You are not alone. Even the big companies also have the same issue. That is why they issue more shares or borrow money from banks.
The following tips are intended to help you to manage insufficient capital in business.
Review Your Business Capital
To tackle this problem, first of all, you need to find out if the amount of money you used to start the business was enough in the first place.
Secondly, if you discover that it was not enough, then you should seek financial assistance from family, friends and associates.
In any case, you should not borrow money from your bank.
Their interest charges are usually too high.
On the other hand, if the business capital was enough, then the problem must be with ways you manage your business finances.
Hence you will need to go back to the drawing board to find out what went wrong.
Identify the causes of insufficient capital and fix it.
For example, you will need to install internal controls in your small business.
Furthermore, you should create cash budget to track all your business incomes and expenses.
Fixed assets vs Current Assets
If you had enough capital but still had this problem, then you should review the ratio of fixed assets to current assets.
For the benefit of non-accountants, fixed assets are the equipment that your business uses to generate income.
Examples include motor vehicles, plants and machinery and so on.
Current assets (aka Circulating capital) are assets that change in value from time to time in the cause of running your business.
Examples are Stocks, debtors, cash at hand, cash at bank and so on.
You should ensure that you did not put so much money in fixed assets.
If you put so much money on motor vehicles and leave only a small amount of money for stocks, it will affect your business in the following ways:
- You will have cash flow problems
- you will not be able to meet customers’ needs
- you will not be able to meet the day-to-day costs of running your business.
In a retail trade, for example, if you set aside say 30% of your capital for fixed assets and 70% for current assets, it could work out fine.
On the other hand, if you are selling motor vehicles, for instance, the above arrangement will not work.
This is because new vehicles for sale require a lot of money. Vehicles would be classified as current assets.
Therefore, to get out of this problem, you should review how you split your business capital between fixed and current assets.
If need be, you can sell some fixed assets and use the money to increase your current assets.
However, how you allocate your business should depend on the nature of your business.
Stop Credit Sales To Customers
You should 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 capital with customers
- It will put heavy pressure on your cash flow
- You might end up with bad debts which you may not be to collect.
- Bad debts are written off to the profit and loss accounts
- They 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.
Furthermore, you should politely tell all customers pay cash for whatever they want to buy. It should be cash and carry
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:
- You will be getting quick stock turnover
- The faster the rate of your stock turnover the more sales
- the more sales the more profits you will make
- You will always have cash in hand
- You will be able restock when stocks get low
- you will not have the problem of bad debts
- and you may not have much problem with your cash flow.
- Manufacturers and wholesalers will be willing to sell to you without cash
- Banks and other lenders should be willing to fund your business
- Investors will be interested in partnering with you to do business.
Moreover, you should ensure that you stock quality products at affordable prices.
You should not put your money on stock items that your customers do not need.
Plus you should be able to provide an effective and efficient customer service.
Buy Products from Cheap Sources
Another strategy that will help you to deal with insufficient capital is that you should endeavor to buy your stocks from the cheapest possible sources.
In other words, you should purchase your stocks from manufacturers, importers or large distributors.
Some of them may be able to give you trade or cash discounts.
Trade and cash discounts improves your bottom line.
Most importantly, selling at reasonable prices should get you referrals, recommendations and new customers.
Ask Your Suppliers For 30 Days To Pay
Another way you can manage insufficient capital in business is to push for your suppliers to give you 30 days or more to pay them.
However, whether or not you succeed with this option should depend on your past records of doing business with them.
Alternatively, if suppliers refuse to sell to you because you owe them, you can negotiate with your suppliers to reschedule your debts.
This should make it easy for you to pay in little bits.
However, for this to work, you need to prove to your suppliers that you are someone they can trust.
Do not forget that business is built on trust and connection.
Sell All Idle Assets
You should sell any assets such as old vehicles or plants that are not bringing cash into your business.
In other words, you should sell all assets that your business has not used in the last six months.
Use the money to boost your working capital.
Furthermore, you can trade-in old assets that are putting holes in your pocket.
Alternatively, you should consider leasing instead of outright purchase of new ones. This should save you maintenance costs.
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.
Most importantly, the more people know your business, the more sales and profits you should make.
Collect Your Debts Outside
If you have money outside with customers, this is the time for you to go after them to collect your money from them.
You have to do this because they were part of the problem.
They are part of the problem that caused insufficient working capital in your business.
You can set up a crack team to go on debt recovery drive.
To encourage them, you should consider giving them little rewards for any money recovered by them.
Do not allow your business to join the league of failed businesses.
If you do not want that, you should use the above tips to save your business.
By Samuel Ijenhi