Don't Let Undercapitalization Affect Your Manufacturing Company
Even without a full understanding, it’s obvious from the word itself that undercapitalization is not good for your business. Undercapitalization occurs when a business holds insufficient funding, or capital, to support its operations. It can cause serious concerns about a potential major financial crisis for any business, but among manufacturing contractors, it is considered by many financial experts to be the leading cause of business failure.
Obviously, your production operation needs enough money to achieve your financial and business goals. More specifically, you never should underestimate how much capital you will need to pursue the most profitable manufacturing projects. Business owners who aren't fully aware or conscious of the money required to get a business up and running, and then sustain it as they work to establish a commercial foundation, may find themselves undercapitalized. For any business, the challenge is that undercapitalization can quickly turn into a perpetual downward spiral from which it is difficult to recover.
A manufacturing facility needs to maintain its focus on attaining and sustaining the cash necessary to fund projects in terms of employee wages, equipment, and supplier materials before the first payment.
The Impacts of Bad Cash Flow
Bad decisions often are made when a company's management is forced to wrestle with poor cash flow. Behind-schedule payments have an increasingly detrimental effect on the company's cash flow and begin that downward slide toward undercapitalization.
One cash flow issue you should try to avoid is mistaking cash receipt or positive cash flow with excess cash. Once the money is spent, there's no way to get it back, right? So a monthly budget and cash flow projection is one of the best tools you can use to manage your cash flow. Regular comparison of current and projected expenses, for example, will help keep you on track with spending.
Although getting paid on time can be an ongoing struggle, you can take some steps to address this issue as well. Understanding how each client handles its accounts payable when you contact them for payments will help you maintain a positive cash flow. Missing an invoice or having poor-paying clients can lead to additional problems, so stay committed to your accounts receivable process.
The Rewards of Planning
One of the most important skill sets necessary to avoid undercapitalization is the ability to develop a comprehensive, accurate manufacturing project plan. By determining your manpower, equipment, and cash items up front, you will enhance the chance of success for your projects. You never want to overestimate your team's capabilities or underestimate your cash flow. If you correctly account for what machinery, tools, and skilled specialists you will need and when they should become involved in the production schedule, you can limit periods of downtime and decreased productivity. Of course, you also need to continually monitor and review your project plan to address any delays or other circumstances that may arise.
Always Strive for Sufficient Capitalization
Undercapitalization can seriously restrict your business's daily operations, growth, and success. Sufficient capitalization, on the other hand, enables a business to handle slow periods in the business cycle and address other challenges that occasionally emerge in the life of a company. More important, it can give you a competitive edge that positions you to grow and move ahead in the manufacturing arena.
To learn more about your financial health, building a project plan, and maintaining healthy capital, contact our experts today.