How to avoid problems caused by ‘overtrading’


For businesses everywhere, the aim is to be successful – but is it possible to be too successful? Well, ‘yes’ is the answer, especially if your business expands too quickly, which is something that can happen to start-ups in particular.

And although it might sound like a nice problem to have, overtrading can be serious, and may even lead to the collapse of an enterprise altogether.

So, what exactly is overtrading and how can you avoid the problems it causes?

What is overtrading?

Overtrading happens when you are selling too much too quickly and simply don’t have the resources to fulfil the orders and meet demand. In this case, lack of resources could mean not having enough cash, staff, time or stock available. A number of scenarios can cause this to happen, such as delays in manufacturing, deliveries taking longer than expected, too many orders at once, customers not paying on time and the price of stock suddenly going up.

If cash is leaving the business sooner than it comes in, the lack of working capital quickly becomes a problem. In the meantime, you still have to buy in stock, as well as pay staff and the monthly bills.

Signs you are overtrading

The following are some typical indicators that your business may be growing too quickly:

  • You need to borrow more to get through each month, for example, to pay suppliers. While going into your overdraft or taking out a small business loan to complete a project is normal, if you regularly need to borrow money just to keep afloat, it’s time to think again, or your bank may limit your credit facility and ask you to put up personal assets, such as your home, as collateral.
  • Too many customers are taking too long to pay for your goods or services, which is affecting your cash flow.
  • You’re operating in a fiercely competitive market, which is driving down prices and putting pressure on your profit margins. You’re putting in the hours and working as hard as ever, if not harder, but for less and less in return.
  • You are slower to pay suppliers, which makes them nervous. They change their terms of credit or want paid up front for goods or raw materials, causing you more cash flow problems.
  • You have taken on more work than you can actually deliver, so you have to hire a contractor. You don’t want to turn down the work, but hiring a freelancer makes the job unprofitable.

Spotting overtrading isn’t always easy although a good accountant or business manager will be able to flag up potential issues well in advance, giving you time to react. Either way, it’s important to try and nip overtrading in the bud before it grows into a real problem.

Some ways to avoid overtrading

A combination of more effective debt management strategies and a change in your business practices can help deal with problems caused by overtrading.

  • New payment terms: Consider setting new payment terms with customers. Renegotiating with existing customers who’ve become used to the present arrangement may not be easy, but is definitely worth pursuing – just give them plenty of notice.
  • Negotiate with suppliers: Again, easier said than done, but it’s always worth trying to restructure payment terms in a way that suits both your business and your suppliers. Remember, suppliers will also benefit if your business grows in a more sustainable way.
  • Offer discounts for early payment: This is now a common practice and a great way of incentivising customers to settle their account early, which is sure to help your cash flow.
  • Automated payments: Avoid the old ‘the cheque’s in the post’ excuse when chasing up debtors by switching to automated payments, using the likes of BACS for payment straight into your account.
  • Consider factoring or invoice discounting: Factoring means selling your invoices to a company who then take over the responsibility of collecting what is owed. Invoice discounting is when you borrow on the value of what you are owed but still have to recover payments.
  • Improve stock control: Holding stock costs money, so aim to turn it over more quickly if possible, reducing the time between buying in supplies and shipping it out to customers for payment.
  • Use HP or leasing to buy assets: Instead of investing capital in paying for assets, consider leasing or hire purchase. With leasing, you never actually own the equipment, but pay a fixed monthly cost. It can also be a cost-effective way to afford new equipment. With HP, you have to put down a deposit and pay a fixed monthly sum. You own the item when the whole sum is repaid in full.
  • Issue shares: One way of raising capital for the business is by selling shares in the business, but only consider this if you’re happy enough to give up equity in your company.
  • Short-term cut: No one likes to accept a cut in salary or a dividend not be being paid in a given year, but it can be a part of the answer in the short-term, if unsustainable over a longer period.

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