It is possible to grow your business too quickly, it’s called overtrading and it can be dangerous.

Managing growth can be tricky, requiring a careful balancing between meeting customers’ orders on the one hand, and not over-stretching the resources and ability of the business to meet these orders on the other.

This constant balancing act is at the heart of a key risk for many businesses – the risk of overtrading – or the ability of a business to safely finance customer orders, before these orders are paid for by customers, without running out of the cash that the business needs day-to-day.

It’s often a particular dilemma for start-up and high growth businesses – finding the cash to fund business expansion, before being paid by your new customers. Even long-established businesses can be affected by over-trading. So all businesses should be aware of the risk and take active steps to prevent it. Luckily, there is a wide range of practical steps and actions that can be taken to manage business growth safely and avoid the risk of overtrading.

Step 1: Listen to your accountant

Your accountant will often be the first to spot the warning signs of overtrading. Listen to advice offered to you, carefully, and then act on it. Do not bury your head in the sand and ignore good advice. Advance planning and taking preventative steps now, could save a lot of trouble later and make the difference between business survival and extinction, especially in the early stages of business growth.

Step 2: Know your cashflow

Cashflow forecasting is an essential tool for any business, either new or well established. Read the ThinkBusiness.ie cashflow guide for more information. You need up-to-date financial information at your fingertips, to help you assess and plan the impact that any business expansion will have on your business’s cashflow.

If you produce and sell a large amount of goods to fill a customer order, this means that the cash represented by these goods will not be available to meet the bills involved in running your business, until you have been paid. You should be realistic in the assumptions that you make about the timing of receipts from customers and the timing of the expenditures that the business will have to make. You should consider the impact that delayed receipts, or earlier expenditures, would have on your business cashflow.

Step 3: Know your customers

Keep your antennae out to detect any signs of developing trouble with your customers (lots of ‘fiddly’ queries about invoices for example, or missed payment promises) or indeed the industry in which they operate. Has there been an unexpected deterioration in demand for the industry’s goods or services, or a change in tax rules that will affect businesses’ ability to pay for goods and services promptly? Spotting these early signs of trouble and taking early steps to limit your exposure or seek out new customers, could make the vital difference.

Step 4: Avoid excessive stock inventories

Many businesses tie up substantial sums in their stock inventories of finished goods and intermediate inputs. Often, this can be for a good reason – there is a need to maintain a “buffer” stock, or demand by customers can be volatile and affected by seasonal factors, including the weather. Having a large amount of cash tied up in stock, which may not be sold for a considerable period, means that the cash represented by this stock will not be available to meet other demands such as staff wages or suppliers’ invoices. The risk is that your business will run out of cash to pay other demands – staff or key suppliers – before it sells the goods and receives payment for them.

For this reason, many businesses now work closely with key customers and with key input suppliers, to minimise their holdings of stock through adopting a “Just in Time” approach to stock production and input ordering. This means taking smaller orders, more frequently, from customers, as well as placing smaller orders for inputs, more frequently, with suppliers.

This keeps stocks of finished goods to a minimum, and also ensures that you are not running an excessive stock of raw materials/inputs. You will need the active cooperation of your major customers and suppliers to make this work, so make sure that you enlist them to the business benefits, for everyone, of working this way.

Step 5: Manage your debtors

Effective credit management and debtor control can help you avoid overtrading, by ensuring that payments due to you are collected promptly and efficiently. You need to ensure that your debtor book is properly controlled and that your business controls its receipts effectively. As part of this process, you should be comparing the monthly debtor days by each debtor, and being alert to any deterioration in trend.

Sometimes, businesses offer a discount to customers where payment is made within a stated number of business days of the invoice being issued. If you offer a discount, make sure that the discount is only taken by businesses that are paying you within the appropriate number of days to qualify for the discount.

Step 6: Collect payments electronically

An often overlooked aspect of collecting payments from customers is minimising the risk that payments from customers are not received in a timely way by your business. Sometimes, difficulties are caused by delayed cheque payments or, when received, in the number of days that it take for payment to be cleared through your bank account.

You should consider encouraging your customers, if not paying you in cash, to pay the amount due directly to your bank account, by including your bank account details on your invoices. Your Bank Identifier Code (BIC) and International Bank Account Number (IBAN) are what’s needed. These are both printed on your bank statement or you can also request them directly from your bank and include them on your invoices. You will also be able to quickly see, if your accounts are online, which payments have been made and so establish which amounts are outstanding and need to be followed up on.

Step 7: Negotiate appropriate payment terms from suppliers

Ensure that you negotiate the best available payment terms from the businesses that supply you. Ensure that you keep to the payment terms that are agreed. Keep a close eye on the amount of supplies that you order in, as you do not want to be running up excessive supply inventories, in which you are effectively tying up your business resources.

Question closely whether the extra discount that may be offered for a larger order is worth it to your business, in terms of the extra inventory that your business has to carry and the likely duration of that commitment. Remember too, that the offer of extended credit terms by a supplier may be at an unattractive cost to the business and it may prove cheaper to finance payment of the goods from your bank or other finance provider.

Step 8: Plan your financial contingencies

If your business is growing rapidly, it is important for you to consider the level of financial resources that is required to support planned business expansion. It may be that your business needs more short term or long term capital resources and there are various sources of finance available to a business. For more details, read the ThinkBusiness.ie Guide on How to Finance your Business.

Banks offer a wide variety of financing options which may suit your business’s particular needs. For example:

  • A temporary need for extra cash could be filled through an overdraft on the business’s current account
  • A need to finance a piece of equipment used by the business could be filled by a leasing or a Hire Purchase arrangement
  • A need to finance the continued growth in your customers’ orders may be met through an Invoice discounting arrangement, in which the bank finances a certain proportion of the invoices issued by your business, on an ongoing basis
  • A need for larger business premises could be filled by a term loan to finance new a building

Talk to your bank about your business needs and how they may help you to meet your business requirements in the most efficient way possible.