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What Is Overtrading And What Are The Risks For My Business?

April 15, 2021 Hasib Howlader What Is Overtrading And What Are The Risks For My Business?

At Hudson Weir, we are first and foremost businesspeople. 

We recognise just how challenging it is to get your company up and running – let alone be a success. We also understand the thrill that many business owners feel as demand for their product or service starts accelerating.

However, you might be surprised to learn that it can be highly detrimental for your business if you sell too much, too fast. 

Sounds strange, doesn’t it? Surely, a high level of sales is the goal for most companies? Not when overtrading is taking place.

In this blog, we discuss what overtrading is and what the associated risks are for your business.

What is overtrading?

Overtrading occurs when businesses do not have the resources necessary to fulfil orders. We tend to see overtrading when a business has grown swiftly.

Generally, an uptick in demand for a product or service is positive – especially in a new, or small, business. 

But without the capacity (resources and infrastructure) to fulfil orders in a timely fashion, overtrading may be looming.

While having plenty of work lined up has its appeals, it’s important to note the serious financial risks of overtrading.

What are the risks of overtrading?

There are several risks from overtrading.

Consider the impact overtrading might have on the quality of a business’ output. 

When you are pressed for time with a backlog of orders, shortcuts may be taken in the production process. Similarly, delivery times may drop off because your workforce is excessively stretched.

Reputationally, this can have a massive impact on your business and could hinder future success. 

Cash flow problems are central to overtrading. An increase in orders doesn’t necessarily mean an uptick in working capital, particularly in scenarios where clients pay on delivery. 

This results in businesses having to seek additional finance to maintain the sales cycle. This often proves unsustainable in the long term and can even lead to business insolvency.

Should a client have to delay their payment – or worse, is unable to make a payment at all – your business is at serious risk, especially so if you have a small number of high-ticket orders.

Cash flow may suffer further from overtrading due to the knock-on effect of increased orders on staff and equipment costs. 

When the going is good, hiring more staff and buying additional equipment to fulfil orders seems sensible. However, should business slow down, you’re left with an unsupportable cost. 

It’s worth also mentioning wellbeing. Business owners and employees alike may find the pressure and stress of a period of overtrading difficult to manage, and impossible to sustain. 

The impact this might have on a business shouldn’t be discounted.

How to avoid overtrading

Having a forensic understanding of your company finances is the surest way to avoid overtrading. 

We would strongly recommend working with an accountant to ensure cash flow forecasts are accurate and that there are no long-term negative consequences of increased business.

An accountant will guide you as to when you should say “no” to new business. Turning down work may seem unorthodox, but consider that the client may experience their own cash flow problems and be unable to pay on time. 

What is the effect on your cash flow going to be? Can you ride it out?  

Some businesses offer discounts to clients who pay promptly or ask for an upfront deposit or payment in instalments to reduce the risk of delayed or non-payment.

While demand from clients (and subsequent payment delays) may be your foremost concern when avoiding overtrading, supplier management can also limit the risks. 

Look to negotiate payment terms that give you some security so that you are not left high and dry should a client fail to pay up.

What do you do if you are overtrading?

If the above is sounding familiar, you may already be overtrading.

In the short term, you might look at reducing equipment costs e.g. via leasing as opposed to buying. 

You are probably already considering alternative finance; there are a range of solutions available, but it is important to find the most suitable.

If VAT and PAYE are also contributing to cashflow problems, consider a Time to Pay arrangement with HMRC to spread those costs. 

When a business is running up debts, our firmest advice would be to seek specialist support from an insolvency specialist. 

A solution such as a company voluntary arrangement can have a positive impact on resolving issues between a business and its creditors, and is likely to be just one of the options an insolvency practitioner will look at.

What is overtrading and what are the risks for your business?

Overtrading is easily done – but it’s highly risky for any business.

Do not be afraid to say no to new work, to safeguard your business’ future. 

At Hudson Weir, we offer a wide range of solutions for companies struggling with debts and managing their cash flow. We’ve seen overtrading time and again – and know how to approach it.

For more information about overtrading or any other business turnaround and insolvency solutions, do get in touch for a no-obligation chat with one of our expert team members.

ACCAThe Association of International AccountantsICAEW Authorised Training EmployerICAEW Licensed Insolvency Practitioners (UK)Insolvency Practitioners AssociationR3

Hudson Weir are an established firm of Insolvency Practitioners who specialise in business recovery and corporate financial solutions.

Hudson Weir provides industry leading, nationwide services for its clients with the intention of easing financial pressures and providing recovery strategies for struggling businesses.

Hudson Weir Ltd (Company number 09477593) is a company registered in England and Wales.

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