Overtrading is a problem which can affect any business but is most common in recent start-ups and rapidly expanding businesses.
Overtrading describes the problems that arise when a business accepts orders for work and then finds that it doesn’t have the ‘necessary resources’ to complete those orders.
What do we mean by ‘necessary resources’? Resources include all the things required to fulfil customer orders and include adequate numbers of properly trained staff; the right stocks in the right quantities; the necessary premises and equipment to undertake the work and sufficient working capital.
Cash often has to leave the business before more cash comes into it. For example, wages and salaries are usually payable weekly or monthly, and there may be other expenses that need to be met promptly, such as telephone bills and rent.
Preparing a business plan can help to avoid overtrading. This doesn’t have to be a voluminous document, but a business tool to help identify the resources needed to meet the likely level of business generated. It will also include profit and loss and cash flow forecasts and should be a working document measuring forecasted against actual business activity.
You may have to assess the need to introduce new capital into the business and consider alternative methods of financing new equipment, possibly by HP or lease finance. Also, reviewing alternatives to traditional bank overdraft finance, such as factoring and invoice discounting may help.
In summary, plan now – don’t bury your head in the sand simply wait until business improves and then panic about how you are going to finance it.