How to Avoid Undercapitalization
Undercapitalization is never good for business. It occurs when a business holds insufficient funding, or capital, to support its operations. This serious concern can lead to a major financial crisis for any business or even business failure.
The obvious solution is to ensure that your company has the right amount of money to achieve your financial and business goals. It is common, however, to underestimate how much capital is necessary to pursue the most profitable projects. Business owners who fail to realize how much money is required to get their business up and running, and then sustain it, likely will be affected by undercapitalization.
How to Stay Solvent
Being aware of your cash flow and funding projects in terms of employee wages, equipment, supplier materials and other obligations before you receive your first project payment will help you stay solvent.
- Don't assume you have excess cash. Receiving payment is not the same as having excess money. Once money is spent, it's gone for good.
- Create monthly budgets and cash flow projections. Compare current and projected expenses regularly.
- Stay committed to your draw dates. Get to know your clients and how they handle their accounts payable so that you can stay on top of receipts.
- Create a project plan. Account for the cost of each employee and any equipment or materials that you may need.
When you properly estimate cash flow, you can avoid undercapitalization.
Undercapitalization can restrict your company's daily operations, growth and long-term success. With sufficient capitalization, you can manage slow periods as well as times of increased production. Having access to sufficient funds is a critical characteristic of a successful small business.
The process isn't easy, but you don't have figure it out on your own. If you want to ensure your business has sufficient capital to pursue the most profitable of projects, contact us. We can walk you through the business plan process. Contact us today to learn more about how to maintain the proper capital in your business and be successful.