Undercapitalization, or lack of sufficient operating capital, simply means the money has run out. The concept is simple, but the root causes of undercapitalization are more complex. Knowing the factors that lead to it can help you prevent them.
Here are some tips on avoiding undercapitalization of your business.
1. Choose an industry you know. Do not rush into a business in which you have little or no experience. Lack of experience can lead to underestimating how much capital it takes to keep the business afloat, which can spell disaster for your new venture.
2. Have a thorough business plan. Your business plan will inform potential investors and lenders about your business and (hopefully) entice them to invest. But it should also serve as a roadmap for starting and running your business. If your business plan is thorough, you will know if your business is viable and whether you can afford to fund it during the startup stage and beyond. Set realistic goals, taking into account worst-case scenarios and planning for these eventualities. See the AllBusiness.com Business Plans center for more information.
3. Get an accountability partner. Many business owners go into business for themselves so that they can be their own bosses. What many fail to realize is that even CEOs of major public companies are accountable to a board of directors. Business owners who have a mentor, accountability partner, or business coach consistently outperform the competition. Getting another perspective is always valuable, and it may spare you from making costly miscalculations. Experience Helps When Looking for Investors.
4. Differentiate your business. Consumers today are overwhelmed with choices; how will your product or service stand out? You may be able to remain meagerly profitable in a saturated market, but unless you give consumers a compelling reason to choose you over someone else, you will not thrive. You may have to close up shop if your revenue cannot meet all of your financial obligations and retain a reasonable profit.
5. Provide stellar customer service. Another way you can differentiate from the competition is through stellar customer service. When it comes to customer retention, business owners should always look for ways to improve their knowledge and skills, as well as those of their employees. Happy customers are paying customers, which keeps the cash flow positive.