Over-trading: how to avoid the biggest threat to most businesses

It seems clear that the economy is now moving in the right direction, albeit slowly, as the damaging effects of the deepest, longest recession in living memory start to fade. If you read a newspaper or watch the TV news, there are plenty of ‘good news’ stories about increasing employment, stable inflation and increased production. So far so good. Especially if you run your own business.

But it is easy to get swept along in a sea of optimism that can, if unchecked, lead to severe problems for business owners.

There is a phenomenon that can cause havoc with cash flow, profitability and, ultimately, jeopardise the survival of any business. It can affect the largest corporation just as easily as the smallest business. And it strikes when you least expect it: when things are going well. When the economy is improving. When the orders are flooding in.
What is this phenomenon?

It is commonly referred to as ‘over-trading.’

Over-trading and how to avoid it

Running out of cash is a real threat to many businesses as confidence improves

Over-trading occurs when a business is so busy making things or providing its services, that it simply runs out of cash. At this stage in the economic cycle, as businesses are becoming busier and things are generally improving for many companies, over-trading becomes more common and business owners need to watch out for the tell-tale signs that it is approaching.

Lots of businesses have come to me for help recently and many of them have fallen victim to over-trading. Business owners became very good at battening down the hatches during the recession and avoiding taking risky decisions or embarking on ambitious expansion or chasing lucrative but challenging contracts. Generally speaking, they sat tight and stuck to safe, tried-and-tested strategies to play safe. But in today’s climate of optimism, there is a real danger that companies can over-extend themselves, taking on new orders, employing new staff, leasing bigger premises and generally increasing their overheads before they have the cash to comfortably afford the increased costs.

Two key factors have greatly increased the danger posed by over trading.
Firstly, the years of recession have stripped many businesses of their spare cash, so there is no buffer to cope with fluctuations in cash flow. It will only take one big bad debt, late payment or miscalculation to put many growing companies into insolvency if they don’t have the cash reserves to cope with unexpected shocks.

The second factor that has increased the chances of businesses suffering from over trading is the lack of bank funding. Many business owners have found that their bank manager is much less likely to lend, especially on overdrafts, which have traditionally been the mainstay of many companies’ borrowing requirements.

But the good news is that, even if your business is running out of cash and the future looks bleak, there are ways of turning the situation around and rescuing the business. There may also be the possibility of accessing finance from a source of alternative finance, rather than relying on the banks, and we can help you with applications to appropriate lenders.

So if your company is struggling with poor cash flow, despite rising orders and increased workload, call us today to find out how we can help.