Six tips to avoid overtrading as the economy recovers
Rising optimism that the long-awaited recovery could be around the corner may result in some businesses overreaching themselves – and ending up with serious cashflow problems.
Overtrading happens when new orders you take on are out of synch with your capacity to do the work. It’s a common ailment that can potentially derail your business if not properly managed.
Issues around overtrading happen when your current assets or working capital are insufficient to bridge the gap between funding new work and getting paid for invoices you have already issued.
Overtrading is particularly common among young manufacturing businesses that have capital intensive manufacturing methods and the need to invest heavily in raw materials.
It also affects fast-growing businesses that are chasing new work but haven’t developed a financial management system that is synchronised with the payment cycle.
Here are six useful tips for avoiding overtrading:
1. Produce a 13 week cash projection to identify weaknesses in your cash flow. This should reflect best, worst and medium-case scenarios
2. Speak to your suppliers about renegotiating credit terms so you pay them after you get paid by your customers
3. Take a careful look at your credit control systems. Set out straightforward payment terms for customers and chase invoices immediately they become overdue
4. Arrange staged payments or deposits for your products or services
5. Be prepared for seasonal fluctuations in sales and ensure budgets reflect this
6. Manage your stock control so that you aren’t carrying excess stock that ties up your working capital. If necessary, have a system in place for selling unsold stock and free up working capital.
Invoice discounting is an effective antidote to overtrading. It involves borrowing cash against your invoices, while staying in control of debt recovery. Factoring is a similar funding stream, but involves the fund provider recovering your customer’s debts.
If you think your business is in danger of overtrading, speak to your professional advisors as soon as possible. Signs that this could be happening include slipping of your payment terms, having to pay your suppliers late as a result and a constant need to access your business’ overdraft facility.