Remedies For Manufacturing Undercapitalization
There are several signs of manufacturing undercapitalization, including slow growth and limited daily operations. A business with sufficient capital can overcome these challenges and slow periods, giving it a competitive edge. Here are some remedies for undercapitalization. If your business is experiencing these signs, we can help.
Undercapitalization can also lead to unfair practices, including share value manipulation. Employees may feel like they have been cheated by rising profits, which can lead to unrest. Higher profits also encourage competitors to engage in ruthless competition and charge workers more. These practices are common among manufacturers but are difficult to remedy without the help of outside counsel. In addition, employees may demand more wages, leading to an unhealthy work environment and increased labor costs.
Undercapitalization is a problem that plagues many manufacturers and is the most common cause of failure for manufacturing companies. Fortunately, there are a couple remedies available for this issue.
- The company can split its shares into smaller pieces. Splitting shares lower the value of each individual share. While the split will decrease the earnings per share of the company, the overall capitalization will remain the same. Also, a stock split will increase the number of shares in circulation but will not reduce the company's EPS. However, the dividend per share will fall. In other words, undercapitalization does not improve the profitability of a company.
- The company can increase the par value of the shares. This will reduce the dividend per share, but this remedy will not affect the total capitalization of the business.
- The company can create a cash flow that is sufficient to meet current production needs. Without sufficient cash flow, the company is in danger of going bankrupt and losing its ability to meet its obligations. To avoid this situation, the company can issue debt, sell shares, or enter into a long-term revolving credit arrangement with a lender.
While the undercapitalization affects profits, it does not affect the solvency of the company.
The negative effects of manufacturing undercapitalization can range from labor conflict to higher taxation. The effects on consumers may also be mixed. Increased profits mean more profit for management, which can encourage them to manipulate share values or exploit customers. And the last effect is a double whammy: undercapitalization makes workers demand higher wages and higher taxes, which can lead to customer resentment and a high tax burden.
When a company is undercapitalized, it cannot fully utilize the potential of its assets. Insufficient capital can cause business problems and limit the company's growth. Having enough capital allows a company to handle slow periods and overcome challenges, giving it an edge over competitors. A healthy capital balance is an essential tool for a company's growth. The effects of manufacturing undercapitalization will be felt long after the company's stock price has recovered.
If your business is experiencing these signs, we can help.