How Lack of Working Capital hurts your Business

January 9, 2023 Globalinfo247

There is this popular expression that says, “people who fail to plan, plan to fail.” No entrepreneur venturing into any business does so with a plan to fail, but inadequate access to working capital and other financing options is a huge contributor to a business’s lack of success and ultimate failure.

Many factors that affects the success of any business majorly goes into a business owner’s lack of working capital, ranging from a low credit score and inability to borrow from traditional financing sources to operational issues affecting cash flow.

Working capital in a small business represents a company’s current assets minus current liabilities. Current assets are the resources that a company can easily convert into cash within one year.

Current liabilities are the debt obligations a company must repay within a year. Working capital measures the efficiency and short-term financial health of a company. Small business owners need sufficient positive working capital to operate successfully.

How Lack of Working Capital hurts your Business

Meanwhile, A lack of working capital presents many disadvantages to small businesses and include the following:

1. Difficulty in Attracting New Investors

A small business that lacks sufficient working capital may find it really difficult to attract investors and lenders because in the business world, working capital shows investors and creditors that a company possesses the ability to pay back its loan or can earn a sufficient profit that allows investors to earn a return on their investments.

While some creditors may require a company to use its assets as collateral, A lot of creditors may view companies without working capital as a risk and will not want to invest with them to avoid loss.

Therefore, the inability to attract investors and lenders may affect a company’s ability to purchase necessary resources or expand its business capacity.

2. Affects the Day-to-Day Operations of the Company

Working capital measures a company’s ability to turn short-term assets into cash. A lack of working capital may jeopardize a company’s ability to finance its day-to-day operations.

Day-to-day operations in a small business typically involves those activities that are being carried out on daily bases and they include but not limited to: salaries, inventory purchases and equipment needs.

A lack of working capital also makes it difficult for a company to prepare for emergencies. For example, if a company loses a majority of its inventory to unforeseen circumstances, a lack of working capital makes it difficult to replace the inventory to operate.

3. It makes it Difficult to Grow or Expand the Business

Positive working capital allows small-business owners to grow their business into the size of their dream business in the future and to also expand their business reach to as much as they want.

Meanwhile, when a company desires to grow or is trying to meet customer demands, it often purchases additional assets needed to manufacture products or offer services at a quicker pace and on a larger scale.

Therefore, a lack of working capital hinders a company from acquiring what it needs to expand and if a company continues to experience problems with growth, it may find itself losing customers to their business competitors.

The Way Out: Ways of Improving your Working Capital

Small businesses struggling to maintain a positive working company must take steps to improve the situation to remain viable.

Below are some of the major ways through which you can improve your working capital:

1. No More Credit on Goods or Services

Your business depends heavily on its ability to sell products, get paid and meet obligations in order to reload your inventories, expand and grow your business. Within this interdependent chain are factors, which by themselves, threaten your ability to meet future obligations as well as lead to business failure. To build up your working capital, your current assets must be greater than your current liabilities.

Unfortunately, a component of your current assets is your accounts receivable. When you work with customers who are slow payers or out of cycle with your accounts payable or bills you pay, you wind up with a cash flow situation that is unsustainable over time.

Which is why one of the major ways to improve the amount of working capital available is to focus on receiving cash payments rather than selling their products or rendering their services on credit.

Emphasizing cash payments may include revising your accounts receivable policies to encourage customers to pay their invoices earlier. Although working capital includes current assets, a company may experience cash-flow problems if assets are not converted to cash.

2. Get a Working Capital Loan

Another option of improving your working capital is when it comes to securing funds for your business is a working capital loan. Working capital loans provide funding to your business under terms that are most agreeable to you and the way you do business.

These loans take into account different factors such as the size of your accounts receivable, the amount of time it takes to collect on your outstanding bills, current liabilities, the size of your inventory and the amount of cash flow needed to adequately run your business. These factors, when taken into account, can provide you with a loan to meet your short-term needs.

Note: You can carryout the research within your location to know which loan company suits you more depending on your needs.

Other methods to increase working capital can include selling long-term assets for cash or increasing sales revenues.

Conclusion

Like I mentioned at the beginning following the popular saying that people who fail to plan, plan to fail. Planing your Business before starting it is one of the basic ways of ensuring that you prevent all possible mistakes that can hinder the success of your business.

A good details business plan or proposal will give you a great insight of what is going to be required to run a successful business of your dream and what challenges you might face along the line to enable you get prepared for the task ahead.

Therefore I will like to recommend that before you start your business, get the proposed business plan ready but if you have an existing business already and currently facing this challenges then you can follow those above provided guidelines to correct them and get your business back on track again.

Do you have any questions, suggestions, contributions, opinions or answers? Kindly use the comment box below.

References: https://smallbusiness.chron.com/disadvantages-lack-working-capital-36193.html

https://mycompanyfunding.com/lack-capital-common-reason-small-business-fails/