Too much business would seem to be a nice problem to have, but as strange as it might seem, fast growth, impressive sales figures and even improved short-term profits do not necessarily indicate ongoing success for a business and can lead to over trading.
When a profitable business expands without the necessary cashflow the business takes on more sales, buys stock, pays wages and overheads and runs out of cash before it gets paid.
One solution to this is to implement practices such as the Just-in Time and Kan Ban principles, which help to reduce capital tied up in stock and free it for use in more effective ways within the business.
Maintaining good management accounts will alert you to the dangers of overtrading. Being aware that growth needs cash is paramount. So, when you are expanding it is important to complete cashflow forecasts and review them regularly.
There are many things you can do to avoid overtrading but one of the easiest ways to improve your cashflow is to implement or improve your credit control policy, which includes having clear payment terms for customers, issuing invoices quickly and having a clear process for chasing overdue payments.
For more information and advice on how to implement or improve your credit control policy, contact Paul Davies on 01489 550480.