As the economy recovers and businesses get back on track – if orders are flying in at a higher rate than ever, surely that is a good thing and business owners have nothing to worry about?
What is overtrading?
Where a business experiences growth but does not have the capital to support the expansion, it is at risk of overtrading. This can be characterised by a struggle to obtain sufficient resource quickly enough to meet demand. The missing piece can be an inability to obtain staff or sub-contractors, or materials from suppliers, which may be caused by a lack of funding to meet the costs of these essential components of the business.
The result of overtrading is frequently worked out as cashflow problems, meaning that suppliers may be unpaid, which can further exacerbate issues with supplies. In addition, contracts may not be fulfilled, and customers left disappointed, causing ongoing problems with the viability of the business. At worst, a business may find itself facing insolvency, which feels counter-intuitive at a time when business was thought to be booming.
How can businesses protect against overtrading?
There is plenty that business owners can do to protect against this risk. The first is to recognise that the risk exists. The second is to plan the resource that will be required to support the predicted level of trading.
Planning is key but must be agile and adaptable:
It is important to recognise that plans will need to be adapted to take into account changing circumstances. Winning a large contract – or not – will make a significant difference to the plan and the resource needed. To take account of this, scenario planning could be carried out to understand the possible different outcomes.
This does not have to be complicated. What will happen if plan A takes effect, and what about if it has to be plan B or plan C?
The important of cashflow forecasting:
Cashflow forecasting is an extremely helpful tool for a business owner to understand where the pinch points may be. If the business is growing, will there be a timing issue between due dates for paying suppliers, staff and tax bills, and the date of receipt of cash from customers? A forecast should be realistic; it should take account of the fact that customers may not pay on time, especially if they are experiencing growth and could have their own cashflow issues.
Why a long term strategy is needed:
As well as the day-to-day needs, business owners should consider the longer-term strategy such as any capital expenditure which may be required to support the business and any restructuring which will allow the business to operate more effectively. Could someone with different expertise complement that provided by employees already in the business?
Can you meet future demand?
Planning how demand will be met will help to identify a likely shortfall in resource before it happens, and whilst there is time to find a solution. Additional funding to cover working capital and growth may be key to unlocking longer term success for the business. Exploring the options early will avoid a time constrained panic and possibly a course of action which is later regretted. There are many innovative funding products available in the market, which has grown hugely in recent decades.
A phase of growth can be an exciting time, and with a solid foundation of capital and planning in place, the business should be ready to fly high.
MENZIES BUSINESS RECOVERY TEAM
Our Business Recovery team are on hand to offer practical support and advice to help you proactively manage your situation. Remember early engagement is key so if you are at all in doubt about the future of your business, please do get in touch with us.
For further information on this article, or to discuss your specific circumstances with an Insolvency Practitioner, please contact our business recovery team below.