Lack of capital is a common problem facing most small enterprises. The ability of a small business to grow into a large company depends on the availability of capital. Saving capital is therefore vital in these enterprises to make them realise organisational goals using minimal capital.
Protecting the working capital is imperative to ensure the business continues operating despite the low capital injection. Working capital refers to the capital needed to sustain the day to day running of the business. It is calculated by subtracting the current liabilities from current assets. Businesses should implement capital saving strategies to ensure the availability of sufficient working capital to
support daily operations. The proposed three strategies would help a small business to operate with limited capital to realise good profit and growth.
Table of Contents
1.Flexible Compensation
The lack of capital problem in small enterprises can be addressed by implementing cost-effective compensation strategies. Labour is a major cost centre in an organisation and increasing labour efficiency would help a business to save capital. Flexibility in human resource management is crucial to enable a business to offload unwanted labour in times of low demand. In other words, a small business should avoid hiring workers on permanent basis to avoid the risk of idle labour capacity when operations decrease. Also, small businesses should adopt productivity-based compensation to ensure workers are paid according to the value they deliver to the business. This strategy guarantees that every cent spent on labour creates value to the business.
2.Creating Good Relationships with Suppliers
The lack of capital problem in small businesses can be addressed by creating sustainable relationships with the suppliers to encourage them to supply inputs on credit. Procurement is a significant cash consumer and implementing the right payables management strategies would help a small enterprise to navigate capital challenges. A business should exhaust the credit periods offered by the suppliers but at the same time making payments on time to protect the relationships with the suppliers.
3.Avoiding Selling On Credit
Advancing credit to customers can be used to build customer relations. However, it poses a cash flow threat to a small business as it ties up capital. It is imperative to control credit sales aimed at protecting the company from cash flow problems emanating from failure by customers to pay on time.
4.Leasing
Small businesses should practice leasing of fixed assets instead of buying to save capital. Leasing allows a business to use an asset by making periodic payments to the asset owner. It is applicable in acquiring businesses premises, warehouses, computer hardware, vehicles, and production infrastructure among other vital assets required to support business operations. Leasing frees the cash flows in the short run that increases the ability to invest in working capital. It also helps to mitigate losses in case of business failure as the company is not left with fixed assets whose liquidation may take time.
Implementing the above strategies would help a small business to overcome the capital shortage problem.
