It can be easy to fall into the trap of taking on too much work for your business.
Even though it may seem like you’re turning over a decent profit, overtrading can actually cause your business to run into financial difficulty.
If your cashflow is starting to decline, you need to assess whether your extra work for your clients and customers is the root cause.
Here’s what you need to know about overtrading and how it can affect your business.
What is overtrading?
Overtrading tends to occur when a business expands too rapidly without having any capital behind it to support the pace at which it grows.
If your business is growing beyond control, it’s likely you won’t have the resources to handle the extra workload capacity demanded of you.
This could mean you don’t have the money to pay for your company’s liabilities or even the materials or inventory to complete a client contract.
One main cause of overtrading could be that your customers are paying their invoices late or buying on credit, which will heavily impact your cashflow. Another could be that you’re overspending on materials and equipment to meet the new demand before you’ve even increased revenue.
Spending money to make money isn’t always the best business strategy.
Signs of overtrading
Although overtrading can sometimes be overlooked, there are definite signs that you and your accountant can identify.
If your cashflow is starting to decline, this could be the first indication of overtrading. Perhaps you are relying heavily on your overdraft, or maybe you have to borrow money from lenders. Either way, these are signs that you have more money going out than coming in.
As mentioned, if you have extended lines of credit to your customers or if they’re paying their invoices late, you will start to notice the discrepancy between your income and outgoings.
But it isn’t always the customer’s fault. If you have taken on far too much work, you may start to fall behind your deadlines. Having too many projects or contracts at once can leave you constantly playing catch up.
While taking on as much work as you think you can manage may seem like a good idea, if it affects the client relationship, you’re doing your business a disservice.
Look at it this way. If a small pop-up café decides to trade at multiple locations in the space of a week instead of the usual one or two days of trade, they will incur further travel costs, have to buy in extra stock, and must pay for additional staff.
While it may seem like a good opportunity, all it takes is a few quieter days for the income to drop, with the extra expenses still needing to be paid.
How to solve the overtrading issue
Catching your business overtrading is better done earlier rather than later. The sooner you realise, the sooner you can put measures in place to stop your cashflow from declining and put you back in the black.
A full inventory assessment is one of the first things you need to do. If you have too much or too little stock, this needs to be resolved as soon as possible. You will need to implement a robust stock control management system that reflects the business you’re working with.
The same goes for any resources, including your team. Although we mentioned that spending money to make money isn’t always a sound strategy, you could benefit from an extra pair of hands to help you handle the increased workload.
This will prevent you from struggling with increased pressures when you could have someone to share the load.
The alternative option to scaling up would be winding down. If you can’t meet your clients’ extra needs, you should think about reducing the amount of work you’ve taken on.
While this may sound counterintuitive as a business, lightening the load will help you focus more on your work and allow you to provide a much stronger service for your clientele. It’s better and more sustainable to complete a smaller amount of tasks to a higher standard than deliver weaker work on a grander scale.
Manage your cashflow
At AssureTax, we help business owners such as yourself manage their income and outgoings to create a sustainable and profitable business.
If you think you may have fallen down the rabbit hole of overtrading, our team is happy to sit down and talk to you about solutions.