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Signs of Overtrading and how you can fix it

Have you heard of the term "overtrading"? and do you know what it means? Overtrading is when a business expands too fast without the resources to support that growth.

These resources could be a lack of cash, people, production capacity or stock. As a result, the business can't deliver on it's commitments to customers, suppliers and employees. So how can this happen?

Generally, it's through sudden and rapid growth within a business meaning that the cash just can't keep up with demand. This growth could be increase in customer demand or a rapid expansion of product lines. Additionally, growth often means an expanding team and employment costs rising before the income is necessarily there to fully match and cover these costs. These factors can often mean that businesses get into a cycle of discounting to get cash in and customers then wait to spend for the next discount code to land in their inbox or the next sale to come around, as they know they won't need to pay full price if they can just hold out a bit longer. This impacts margins and makes cash tighter. Rapidly growing businesses often look to take on finance to help short-term cash but there is a risk that the repayments outstrip the income which could then put further pressure on cash. So what can you do:

  • Renegotiate terms with suppliers - ask for extended terms or a payment plan, they may put you on hold whilst you clear the balance and you may find terms are removed for a period afterwards but in the short term this may reduce the pressure

  • Review all costs - be hard, what are you paying for that's not needed

  • Consider refinancing your borrowings - are you able to extend the terms on any loans or take a payment holiday? Interest will still be added but it might give you a bit of breathing space.

  • Get professional advice if you feel you are in over your head and need an independent eye on your business to give you a fresh opinion and options.


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