Business Finance: Beware the risk of overtrading, warns Chris Sheppard
- Credit: Archant
There has been a steady flurry of indicators so far this year that the UK economy is getting stronger, with unemployment falling, inflation remaining low and GDP expected to reach 2.4%, higher than previous forecasts.
In this environment many local businesses will be looking to secure fresh growth after an unprecedented economic downturn. However, this drive for growth also brings with it the very real threat of overtrading.
Overtrading is defined as the expansion of a business to a point where it cannot finance itself through its available cash resources ? in other words, taking the signal of a growing economy to take on more orders than its cash resources can fulfil, with this increased activity eating up available working capital.
In a poll of East Anglian businesses 48% that we spoke to said that they plan to finance their growth plans using existing cash reserves. However, official figures have shown that there was an 18% increase in the number of businesses going into administration in the last quarter of 2013. Businesses looking to use increased confidence to justify rapid expansion must, therefore, tread carefully ? keeping control of cash is paramount. To counter overtrading, here are five actions to consider:
Firstly, maintain a focus on operational cash management. It is vital that your business maintains a rolling weekly cash flow forecast to get on top of pinch points well in advance. It is not just about not paying suppliers and collecting overdue debts; sustainable wins can come from elsewhere, for example, adjusting the timing of key cash outflows and deferring costs until more of a “steady state” has been achieved.
As always, remember that the earlier you take action the more options you have and the more time to implement them.
Control your sales growth and focus on the cash impact. Gone are the days that your sales teams should solely be incentivised on sales quantum. Focus on cash generation as well.
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Understand how the downturn has changed your market and your own business; who are your new competitors and what are they doing; does your workforce have or need to have a different skills balance?
Finally, if increased activity inevitably leads to an increased funding requirement, it is essential in the current climate to quickly engage with your funder to determine whether they will be supportive.
: : Chris Sheppard if part of KPMG’s advisory practice in East Anglia.