Being undercapitalized and not having the cash to maintain operations and be able to grow is the #1 reason small businesses fail. In fact, 82% of small business failure is due to poor cash flow management. The good news is that with proper planning and a bit of foresight, your business can easily avoid being undercapitalized.
What problems can undercapitalization cause?
Undercapitalization limits growth due to not having the necessary funds for:
- inventory purchases
- meeting demands
- covering lulls in sales during slow periods
- paying bills
- expanding your business
- emergency situations.
With insufficient capital, your business may feel like it is just treading water. You won’t be able to keep up with your competitors or stay afloat.
How can you prevent undercapitalization and better manage your cash flow?
Try the following techniques to help you better manage your cash flow and ensure you always have enough capital on hand.
- Cash Flow Forecasting
It’s important to conduct frequent cash flow forecasting in order to get an accurate projection of your incoming cash and upcoming expenses. This will give you a clearer picture of what your financial needs will be for a given period and allow you time to secure any necessary funding. The most basic cash flow forecast formula is:
Estimated Income – Estimated Expenses = Cash Flow
- Expect the Unexpected
While you may be able to anticipate the majority of your everyday expenses like rent, employee wages, utilities, insurance, and inventory, some of the costliest small business expenses are those that you’re not prepared for. You always want to allow yourself some wiggle room and have enough cash on hand in the event that an unexpected expense pops up like sudden equipment breakdowns, computer failure, tax payments, or even a natural disaster. It’s a good idea to be proactive and secure capital now before you’re in dire need.
A line of credit is a great funding option that can give you peace of mind knowing that funds are always available to use whenever you need them. Like a credit card, a business line of credit provides companies access to a fixed sum of money that is always available to draw upon. Any time cash flow is tight, a business line of credit will allow you to have immediate cash at your fingertips day or night.
- Be Aware of the Warning Signs of Cash Flow Problems
There are some clear warning signs of cash flow problems to be aware of that can help you identify an obstacle before it gets out of control. Some of the most common signs are a heavy reliance on payments from customers, slow paying customers or a high number of outstanding invoices, or a large amount of short-term debt.
If you find yourself in any of these situations, invoice financing may be the ideal solution for your small business. Fundible will purchase your invoices so you can get back to running your business with a full bank account. Invoice financing allows you to cash out on all your slow paying debtors and be able to bid on new jobs, buy the equipment or materials you need, or even make payroll.
- Avoid Spending Too Much, Too Soon
If your company is relatively young, it may take some time before your business is stable. Don’t let bills pile up and make sure to stay on top of your finances so you have a snapshot of what you owe and what you have coming in. Although you may be doing well, it’s important to avoid frivolous purchases, overexpand, or overorder inventory. And while you never want to repress growth, you should always focus on steady growth instead of rapid growth that may not be viable long-term. Keep in mind that new business owners often underestimate how much money it takes to sustain a business.
If you think now is the right time to grow your business, you may want to consider a small business term loan. A small business term loan can provide you with a stable long-term financing option to grow your small business in a big way.
Having adequate capital can help you grow
At Fundible we believe that every business is distinct, and your financing should be too. Our discovery process allows us to identify your needs as a business owner, find all possibilities available to you, and present you with the best ones. We let you decide which program best suits you and your business. That is how we can provide tailored fit financing for any industry with any credit profile!
If you’d like to learn more about how our programs can help your business, contact us today at (855) 784-0008 or apply today to get started!