Overtrading occurs when a business takes on more work than it is able to fulfil. The good news is that 82% of Sage customers expect their businesses to remain stable or grow in 2012. However the biggest challenge for 1 in 4 businesses is collecting payments from their customers on time*. As anyone in business will tell you, this can put a strain on your cash flow which can ultimately lead to insolvency.
The combination of both of these scenarios is the risk of overtrading.
Overtrading may not be a term widely used but it is a common downfall for many businesses. At face value it sounds great; getting more business, winning new contracts or even receiving larger orders. But when you come to fulfil the orders, how are you going to pay for the materials, wages or transport costs to supply the goods or services that you offer?
Having enough money, working capital, to fulfil any orders is a must otherwise you could lose the order/contract or worse; your business could become insolvent trying to fulfil orders you do not have the resources for.
How to avoid overtrading
Here are some handy tips to help avoid you overtrading, keep your business healthy and your cash flowing in the right direction. You might also find our Guide to Cash Flow really handy.
- Regularly produce a cash flow forecast to highlight any risks to your cash flow. You can link your Sage Instant Accounts with Sage Planning for Business to help you forecast.
- Renegotiate your credit terms with suppliers so you can collect payment from your customers before you pay your supplier. If you’ve got Sage Instant Accounts or Sage 50 Accounts you can record different details for each supplier so you can treat them differently.
- Improve your credit control processes; have clear payment terms for customers, issue invoices quickly and have a clear process for chasing overdue payments.
- In both your Sage Instant Accounts and Sage 50 Accounts you can offer your customers a settlement discount if people pay within a specified timescale, so use it to offer discounts for prompt payments.
- Negotiate staged payments or deposits for services/products you offer.
- Sell the right products and services at the right time of the year.
- Improve your stock control: Sage Instant Accounts Plus and Sage 50 Accounts give you visibility of the items you have in stock and what are your best selling items or alternatively what items are not selling. That way you’ll avoid carrying too much stock which can hold up your working capital.
- Hold sales to move unsold stock which reduces your working capital.
- If all else fails, there are options such as invoice discounting which allows you to draw money against your invoices while retaining control of the administration for debt chasing. Alternatively you could use a factoring company so they take responsibility for recovering your customer’s debts.
Following the tips above will help you avoid overtrading and give your business all the ingredients you need to grow your business: Healthy cash flow with happy customers and suppliers.
Gareth Underwood, Sage 50 Accounts team
(*November Omnibus survey – 993 responses)