Insufficient Financial Resources and Deficiency Of Capital

The financial sector and its role in the process of Economic Development has attracted notable attention since the early 1990s. In particular, the crucial need for a stable Banking system was highlighted in the wake of the Asian financial crisis of the late 1990s. The rapid influx of short-term, speculative capital flows to Asian economies was a major contributing factor to the crisis. States with stronger domestic financial sectors and particularly robust banks, however, better absorbed the ripple effects of the external shock. Increasing the openness of Financial Markets via Liberalization-2/”>Liberalization may not be positively related to economic Growth unless banks are stable and sophisticated enough to absorb international Investment, competition, and negative shocks.

Development of a nation without the availability of adequate capital either in the form of physical capital or in the form of Human Capital is not possible. The higher the rate of Capital Formation (physical as well as human), the faster is the pace of economic growth. On the other hand, deficiency of capital has been the primary cause of underdevelopment in the third world economies

Main reasons for low rate of capital formation in an economy

# Low Level of NATIONAL INCOME and Per Capita Income:

The root cause of capital deficiency in under-developed countries is low level of real national and per capita income which limits to the Motives of Savings and investments.

Due to lack of desired investments, capital formation has no increase. Hence, due to low production, there is low national and per capita income and, in turn, this forces to low capital formation.

This situation tends to perpetuate itself and the poor countries continue to be poor. The low rate of capital formation is a partial link in a vicious circle in such countries. Unless, the vicious circle of POVERTY is broken, the rate of capital formation cannot be raised.

# Lack in Demand of Capital:

Another cause of low rate of capital formation in under-developed countries in lack of demand of capital. In the words of Prof. Nurkse, “Low productivity in under-developed countries, people have low real income and, thus, purchasing power is low and so due to low demand, investment has effect which again reduces national income and productivity and rate of capital formation remains low”.

# Lack in Supply of Capital:

Like demand of capital, lack of supply of capital is responsible for low capital formation. However, due to lack of necessary supply of capital in under-developed countries, the process of capital formation is not boosted up. As a result, capital formation remains at low level. Therefore, in the opinion of Prof. Nurkse, Due to low rate of real income per capita in under-developed countries, there is low saving capability, hence, there is less capital. Due to lack of capital, there cannot be established basic business and industries so the production falls down.

# Small Size of Market:

Due to small size of domestic market, investment is not encouraged in poor countries. It does not expand the work of economic development and modern machines cannot be used as extra quantity produced has no market access.

# Lack of Economic and Social Overheads:

Basic overheads like roads, buildings, Communication, Education, water, Health etc. are generally lacked in under-developed countries which react as improper Atmosphere for the capital formation and slow process of capital formation.

# Lack of Skilled Entrepreneurs:

Able and efficient entrepreneurs are not available in under-developed countries. It is the only reason for low rate of capital formation. Due to absence of risk-taking entrepreneurs, establishment of industries and expansion is quite limited and industrial diversification is not carried out and no balanced development of economy is possible.

# Immobility of Savings:

Immobility of saving also causes low rate of capital formation. Due to lack of banking and other credit institutions, poor countries have limited financial activities. Whatever, these financial institutions exist, they are of small size and unable to collect the savings from distant places, thus, resulting in no enthusiasm to savings in a Society. This creates the problem of hoarding and saving is used for non-productive purposes.

# Backwardness of Technology:

Under-developed countries also face the problem of technical knowledge. Production is carried on old and less productive techniques. As a result, these countries have low productivity and per capita production and income’s low quantity, lowers the standard of the rate of capital formation.

# Demonstration Effect:

Demonstration effect also stands in the path of capital formation. Prof. Nurkse has cited the reason of low rate of capital formation, “due to demonstration patterns of people come into contact with best goods or superior patterns of consumption in which old demands are fulfilled by new goods and new plans, then, they after some time fell unrest and discontent. In this way, their knowledge grows their imagination is stimulated, new desires are awakened. By this their propensity to consume becomes high”.

Besides, there is tendency among people of these countries to follow the higher consumption standard of developed countries. In fact, all these actions occur due to demonstration effect which increases the tendency of consumption based on new ways and goods which limit the desire and capability to save in the society.

# Lack of Effective Fiscal Policy:

Lack of effective fiscal policy or financial policy in under-developed countries also retard capital formation to some extent. Burden of Taxation is too much which is out of people’s capacity to bear as their income is quite low. Besides, inflationary circumstances accrue and prices soar extremely high.

This leads to increase in cost price of capitalized goods and not Consumption Goods by which exported goods in internal market do not hold in external market in competition to best and cheap goods. This creates the problem of unfavourable Balance of Trade and payment. Thus, these countries have very low rate of economic development and capital formation.

# Lack of Investment Incentives:

Still another cause of the low rate of capital formation is the lack of investment incentives in most of the under-developed countries. This leads to low rate of productivity which, in turn restricts capital formation.

# Deficit Financing:

In modern times, deficit financing is considered a major resource of capital formation. But, if it crosses its limits, then it tends to low rate of capital formation. Whenever, deficit financing is made in the country, it leads to rise in prices and as a result, all commodities become costly. Under this situation, it becomes hard to save as the entire amount is spent. This results in the saving and low rate of capital formation.

# Unequal Distribution of Income and Wealth:

Since there is extreme unequal distribution of income and wealth in most of the under-developed and backward countries which keep the rate of capital formation relatively low. In fact, it restricts real investment in the economy which greatly effects the capital formation.

# Demographic Reasons:

In under-developed countries, the growth rate of Population is very high which keeps the rate of capital formation at a low level. It is because most part of their income is spent on bringing up the additional numbers. Thus, there is little scope of saving and as a result, it aggravates the growth of capital formation.

Insufficient Financial Resources and Deficiency Of Capital

Insufficient financial resources and deficiency of capital are two of the most common problems that businesses face. These problems can lead to a number of other problems, such as late payments to suppliers, missed payroll, or even bankruptcy.

There are a number of reasons why businesses may not have enough financial resources. One reason is that they may not have enough capital to start with. Capital is the Money that businesses need to invest in their operations, such as buying equipment, hiring employees, and Marketing their products or Services.

Another reason why businesses may not have enough financial resources is that they may not be managing their cash flow effectively. Cash flow is the movement of money into and out of a business. If a business is not managing its cash flow effectively, it may not have enough money on hand to cover its expenses.

Businesses may also not have enough financial resources if they are not making enough profit. Profit is the money that a business makes after it has paid for its expenses. If a business is not making enough profit, it may not have enough money to reinvest in its operations or to pay its debts.

There are a number of things that businesses can do to address the problem of insufficient financial resources. One thing that businesses can do is to raise capital. This can be done by selling Shares in the business, taking out a loan, or getting a line of credit.

Businesses can also improve their cash flow management. This can be done by collecting payments from customers more quickly, paying suppliers more slowly, and negotiating better terms with suppliers.

Businesses can also increase their profits. This can be done by raising prices, cutting costs, or increasing sales.

If a business is unable to address the problem of insufficient financial resources, it may be forced to close down. This can have a devastating impact on the business’s employees, customers, and suppliers.

It is important for businesses to be aware of the risks of insufficient financial resources and to take steps to avoid them. By doing so, businesses can increase their chances of success and avoid the negative consequences of financial problems.

Here are some additional tips for businesses that are struggling with insufficient financial resources:

Cut costs: One of the quickest ways to improve your cash flow is to cut costs. This may mean reducing your workforce, negotiating lower prices with suppliers, or eliminating unnecessary expenses.
Increase sales: Another way to improve your cash flow is to increase sales. This may mean expanding your marketing efforts, developing new products or services, or entering new markets.
Get help: If you are struggling to manage your finances, it may be helpful to get professional help. A financial advisor can help you create a budget, develop a financial plan, and negotiate with creditors.
Don’t give up: It is important to remember that even the most successful businesses have faced financial challenges. If you are struggling, don’t give up. With hard work and dedication, you can overcome your financial problems and build a successful business.

What are the causes of insufficient financial resources?

There are many reasons why a company might not have enough financial resources. Some common causes include:

Unforeseen expenses: Unexpected events, such as a natural disaster or a lawsuit, can quickly drain a company’s cash reserves.
Poor financial planning: A company that doesn’t have a solid financial plan in place is more likely to run into cash flow problems.
Inefficient operations: A company that is not operating efficiently may be spending more money than it needs to, which can lead to financial problems.
Lack of investment: A company that doesn’t invest in its future may not be able to generate enough revenue to cover its expenses.

What are the consequences of insufficient financial resources?

Insufficient financial resources can have a number of negative consequences for a company, including:

Cash flow problems: A company that doesn’t have enough cash on hand may not be able to pay its bills on time, which can damage its credit rating and lead to collection actions.
Operational problems: A company that doesn’t have enough money to invest in its operations may not be able to keep up with the competition, which can lead to lost sales and market share.
Financial distress: A company that is unable to meet its financial obligations may be forced to file for bankruptcy, which can have a devastating impact on its employees, customers, and suppliers.

How can a company overcome insufficient financial resources?

There are a number of things that a company can do to overcome insufficient financial resources, including:

Cut costs: A company can reduce its expenses by cutting back on unnecessary spending, such as travel and entertainment.
Increase revenue: A company can generate more revenue by selling more products or services, raising prices, or expanding into new markets.
Borrow money: A company can borrow money from a bank or other lender to cover its short-term cash flow needs.
Sell assets: A company can sell off assets, such as equipment or real estate, to raise cash.
Issue Equity: A company can issue new shares of stock to raise capital.

What are the benefits of having sufficient financial resources?

There are a number of benefits to having sufficient financial resources, including:

Peace of mind: A company that has enough money in the bank doesn’t have to worry about running out of cash and being unable to pay its bills.
Ability to invest: A company that has a healthy cash flow can invest in its future, such as by expanding its operations or developing new products.
Ability to weather storms: A company that has a strong financial position is better able to weather economic downturns or other unexpected events.
Ability to attract investors: A company that is financially healthy is more attractive to investors, which can help it raise capital for growth.

A company is said to be financially constrained if it:
(a) has insufficient financial resources to meet its current obligations.
(b) has a high debt-to-equity ratio.
(c) has a low return on assets.
(d) has a low return on equity.
A company’s financial resources are:
(a) the funds it has available to meet its current obligations.
(b) the funds it has available to invest in new projects.
(c) the funds it has available to pay dividends to shareholders.
(d) the funds it has available to repurchase its own shares.
A company’s Capital Structure is the mix of debt and equity financing it uses. A company with a high debt-to-equity ratio is said to be:
(a) financially constrained.
(b) highly leveraged.
(c) financially healthy.
(d) financially unstable.
A company’s return on assets (ROA) is a measure of its profitability. A high ROA indicates that the company is:
(a) generating a lot of profit from its assets.
(b) not generating enough profit from its assets.
(c) using its assets inefficiently.
(d) using its assets efficiently.
A company’s return on equity (ROE) is a measure of its profitability. A high ROE indicates that the company is:
(a) generating a lot of profit from its equity.
(b) not generating enough profit from its equity.
(c) using its equity inefficiently.
(d) using its equity efficiently.
A company’s financial statements are a set of reports that provide information about the company’s financial position, performance, and changes in financial position. The three main financial statements are:
(a) the balance sheet, the income statement, and the statement of cash flows.
(b) the balance sheet, the income statement, and the statement of retained earnings.
(c) the balance sheet, the income statement, and the statement of changes in equity.
(d) the balance sheet, the income statement, and the statement of changes in net worth.
The balance sheet is a financial statement that shows a company’s assets, liabilities, and equity at a specific point in time. The assets of a company are:
(a) the things that the company owns.
(b) the things that the company owes.
(c) the claims that the company has against others.
(d) the claims that others have against the company.
The liabilities of a company are the things that the company owes to others. The liabilities of a company can be classified as:
(a) current liabilities and long-term liabilities.
(b) short-term liabilities and long-term liabilities.
(c) non-current liabilities and current liabilities.
(d) non-operating liabilities and operating liabilities.
The equity of a company is the difference between the company’s assets and its liabilities. The equity of a company can be classified as:
(a) common stock and retained earnings.
(b) preferred stock and common stock.
(c) common stock and treasury stock.
(d) common stock and paid-in capital.
The income statement is a financial statement that shows a company’s revenues, expenses, and net income for a specific period of time. The revenues of a company are:
(a) the things that the company owns.
(b) the things that the company owes.
(c) the claims that the company has against others.
(d) the claims that others have against the company.
The expenses of a company are the costs that the company incurs in generating its revenues. The expenses of a company can be classified as:
(a) operating expenses and non-operating expenses.
(b) selling, general, and administrative expenses and research and development expenses.
(c) cost of goods sold and operating expenses.
(d) cost of goods sold and selling, general, and administrative expenses.
The statement of cash flows is a financial statement that shows a company’s cash flows from operating activities, investing activities, and financing activities for a specific period of time. The cash flows from operating activities are:
(a) the cash flows that a company generates from its core business activities.
(b) the cash flows that a company generates from its investing activities.
(c) the cash flows that a company generates from its financing activities.
(d) the cash flows that a company generates from all of its activities.
The statement of changes in equity is a financial statement that shows the changes in a company’s equity