I speak with many small business owners and find that for the majority, they are in danger of over-stretching themselves and their resources and then running out of money during 2016 as we now see a period of increasing business and consumer confidence.
History has certainly shown us (CMC Partners have over 25 years of advising UK business owners) that during periods of economic recoveries, we have seen many small and medium-sized enterprises (SMEs) over-stretch themselves financially and simply run out of working capital.
By definition this is called ‘over-trading’ when a business runs out of cash. This is most evident in manufacturing and service based companies when businesses have to commit to the raw material to make the products that are in demand due to rising sales. This will typically result in negative cash flow situation as payment for the finished goods will be in 3 or 4 months’ time, but the payment to the or employees supplier is on next month or 60-day terms or even worse – payment up front.
While everyone may be celebrating the increase in orders, this can have major consequences and catch out even the most experienced director by putting serious strain on financial and operational systems and controls manned by depleted teams.
Traditionally, each time the economy recovers from a recession or downturn, a large number of businesses fall victim to over-trading and end up failing in what should be good times, despite having survived years of bad.
Do not be one of these businesses, take these 5 tips to avoid business failure:
- Prepare a financial model, comprising of 12 monthly integrated balance sheets, profit and cash flow projections to reflect differing levels of growth so as to be able to identify additional working capital parameters.
- Review the likely working capital needs of the business in a growth scenario and engage with shareholders and lenders to gauge their appetite for further investment and funding.
- Consider alternative financing sources such as invoice discounting or factoring as a means of managing cash flow between invoices being issued and paid.
- It also pays to talk to your bank and keep up good relationships with your bank manager – then keep them informed of your growing sales book and any temporary negative effect on your cash flow.
- And finally speak to your advisers, such as your accountant, managers, shareholders or CMC Partners.
If you want to know how to recognise and deal practically with over trading post the current economic downturn and to grow your business sustainably or if you would like to explore how Phil can support you through your business journey, contact us via this form.