To successfully manage a business, you will need to rely on a whole array of factors coming together. While you can plan meticulously, hire the right talent and forge a brilliant marketing plan, ultimately, to survive each day, you need one thing above anything else: capital.
While a company must be self-dependent and able to take care of itself, it takes time before it can start generating the kind of revenue on which to be self-sufficient. Therefore, until your business can fend for itself, it needs to be supported through the use of capital injections, usually from investors, business owners, equity, or creditors. These cash injections are designed to help you overcome any short term difficulties and ensure that you retain day-to-day cash flow.
When Do You Need a Capital Injection?
However, it’s not a viable or sustainable approach to constantly dip into your reserves, or ask investors for extra investment every few months. During the early stages of your venture, financial resources will be decidedly finite, while future investors might question your business management skills if you are always in need of extra cash to plug gaps.
As a result, you should only seek additional finance when it is desperately needed. To illustrate when it is acceptable to do so – and to help you prepare for the eventuality – here are eight scenarios in which your business is likely to require capital injection.
1. To Survive the First Year
Most new enterprises make their biggest mistakes in the first year. Due to your inexperience, many of your decisions may be taken on a trial and error basis, with some processes beneficial and others destructive. Therefore, you will likely need extra capital to cover these costs, especially as you are unlikely to be in profit during this period.
As a result, for the first year, your organisation will still be heavily dependent on equity. However, as equity may be intangible, you will need tangible capital to keep your business running. That is why it is crucial to have back-up funds arranged and readily available from close sources, whether it be your own savings or small loans from friends and family.
2. Unexpected and Immediate Expenses
No matter what industry you are operating in, it's a simple reality that, at some point, unexpected expenses will occur. You might have mechanical problems with your work vehicle, or a customer might increase an order at the last minute, requiring you to purchase extra materials; either way, when something happens, you need to be prepared for such expenses. Many small businesses maintain an emergency fund for such instances, so be sure always to keep something stored away.
3. A Low Credit Score
In financial and legal terms, your business is an extension of you, and if you have a low credit score, then you probably won't be able to get the kind of loan that your business needs. Most reputable banks will not be comfortable giving you short-term capital, which is why it is vital to have excellent relationships with trade creditors who will be able to provide you with working capital at a moment's notice.
4. For a New Product Range
The chief objective of every business is to continually grow and become successful. As such, at some point, you are going to have to diversify your product or service range. Unsurprisingly, this requires additional capital, particularly if you need to cover R&D costs and invest in new technologies or materials. While these new products may project healthy returns in the future, you can't take a step forward unless you can cover the costs in the short term.
5. To Fund Marketing Campaigns
Your business could offer the best product or service in the world, but if people are unaware of its existence, then you may as well close up shop.
In today's connected age, marketing and brand relevance is everything. However, it also comes at a cost. Even though the digital ecosystem has substantially reduced the costs of advertising, it has certainly not made it free. This is where extra capital is useful, particularly if you are struggling to drum up sales and need to launch a targeted, well planned, multi-platform campaign.
6. To Upgrade Services
In order to maintain the loyalty of your customers, you must upgrade your product or service in line with wider market developments. If you allow your product to stagnate and fall behind what your competitors are offering, it will become a thing of the past, and no amount of marketing will make it relevant.
Upgrades ultimately depend on trends and needs, and either can occur at any time. As a result, it is crucial to have quick access to working capital to find improvements and optimise your product.
7. To Hire and Retain Talent
In any organisation, your most valuable asset is your people; if you don't have the best available talent running your business, then you may not have the best business.
However, top talent comes with a prime fee. You might settle for something less, but that means your business ambitions will also have to compromise; after all, low-cost talent is equal to low-quality output, which is bad for business.
When you are starting, your objective will be to optimise costs and, within reason, cut corners. As the business grows, though, you will realise that for your business to explore its full potential, it needs to have the right people managing it. Extra capital will allow you to accommodate competitive salary packages for your people.
8. To Encourage Loyalty
While employees run the business, it is your customers that maintain and grow it, and modern consumers demand not just value for the prices they pay, but also appreciation for their loyalty.
One of the best ways to satisfy this customer need is to offer credit and discounts on your products or services. While this strategy is not designed to generate profits directly, it does build a stronger and deeper connection between your brand and your customers – an approach that, unfortunately, will require extra capital.
Your business will undergo many changes throughout its life cycle; a partner may leave, or a product may go rogue. There may be a possible lawsuit or even a business dissolution. Whatever the problem is, to solve it, your business will need more capital than you have earmarked. Having extra cash set aside or readily accessible will help your business stay afloat and keep you prepared during business emergencies.
Capital injections also provide a safety net for the general teething problems of a business. Wholesale business investments can go haywire, for example, while allotted budgets may never get utilised for their listed purposes. Cash boosts address the specific needs of the business, meaning that it will always be used for its intended purposes and be accountable to your investors and stakeholders.
Remember: investment may get a business up and running, but working capital keeps it alive. Your organisation – be it old or new – will always require cash; it is a question of how ready you are when the situation arises.
What are your thoughts on the long-term sustainability of frequent cash injections? Are they healthy for a business, or a sign of a broader issue? Let us know your thoughts in the comment section below.