Overtrading is the term used when a business expands rapidly without having the necessary working capital to do so. It is a bad thing because it can cause an otherwise successful business to run out of cash and fail. With a strengthening economic recovery this is exactly the time most business rescue specialists expect businesses to over trade.
It is all about the cash cycle - the length of time that cash is required to fund the business before the customer pays for the goods. You get a large new order and you think great business is on the up. But to complete that order you need to buy in the raw materials and pay staff overtime to get the job done. You may be up to your credit limit with your suppliers and have to pay cash, or on 30 days. Trouble is your customer will only pay in 90 days. The order is profitable but you just don't have the cashflow to enable you to deliver - that is what can cause the business to fail.
To get back on track you will need to increase the working capital deployed in your business. This could be done by reducing the length of the cash cycle by insisting on faster payment by customers or negotiating slower payments to suppliers. Alternatively it could be that through raising additional funds, for example by factoring.
The answer is to have a business plan, maintain up to date management information and monitor this against the plan. In this way you will know the problem is coming long before it arrives and so have time to take avoiding action. Running a business is a bit like driving a car; if you do not know where you are it isn't likely that you will arrive at your planned destination.
If it is too late and you find your company is already overtrading and you can't raise enough additional funding then talk to us. We have access to short term funding and can help you manage cashflow. For further information about our services generally get in touch now by calling 0800 331 7417 to arrange a free no obligation consultation by telephone or a face to face meeting on or off your premises.