Generally, it’s assumed that businesses struggling to attract custom are the ones that end up strapped for cash, but the reality is very different. 

When a small business sees a surge in demand, it can be an extremely exciting time. But just because there has been in influx in custom doesn’t necessarily mean that cash will be flowing smoothly through the company. When a business has more demand than it can afford to service, this is known as overtrading, and it can be extremely harmful. It can also be enormously frustrating because even though the demand is there, the business may struggle to provide products or services to their usual high standard, due to a lack of available funds. 

Danger ahead

First and foremost, it’s important for business owners to look out for the overtrading warning signs and act sooner rather than later. If your business is in danger, you may notice a few signals indicating that you are overtrading. Problems may arise following a surge in customers, or even after just one or two big orders from a current or new client. When these customers don’t pay on time, your stress levels may increase and your accountant is likely to look a little worried too. 

It recently came to light that SMEs are owed £40bn by late payers, and with these outstanding invoices stifling growth and restricting cash flow, there’s no denying just how common overtrading can be. Furthermore, in a study conducted by Sage Pay, it was found that 67 per cent of SMEs spend two weeks each year chasing unpaid bills, putting a further strain on time and resources. 

When overwhelmed with late payments, it’s understandable that businesses may struggle to pay their own suppliers on time too. It can be a vicious cycle stretching between several companies, causing a string of delayed payments and unnecessary stress. 

Break the chain

By breaking the chain and resolving your own overtrading issues, you may be able to make life easier for your suppliers and clients too, potentially improving your relationships with them and encouraging a prompt payment culture. 

If business seems to have ground to a halt due to a lack of funds or resources, it’s important to act fast. Once you’ve taken note of the root causes of your overtrading problem, put a cash flow plan into place. By planning in advance, you can ensure that you are prepared. 

This means you need to project monthly sales, be realistic on timing, and consider how your business might grow over the next year. Also, factor in a rainy day fund should you need a sudden injection of cash in an emergency. 

Encourage prompt payments

It’s understandable that you may not want to hassle your clients for payment, particularly if you don’t want to jeopardise relations, but by failing to address the issue directly with those responsible, you’re putting your business on the line. To emphasise the urgency of the matter, one in four SMEs admitted that if the amount owed was to reach £50,000, the business would be sent into bankruptcy.

Thankfully, there’s no need to approach your clients with negativity, the problem can often be solved by offering customers incentives to be timely. You could offer those that pay within a fortnight a percentage discount for example. Also, to ensure you receive a good sum of the money in advance, you could request 50 per cent of the payment to be made up front to cover costs.

Overtrading can be stressful for everyone involved, but if you address the problem head on and do what you can to encourage prompt payments, while managing your own finances effectively, you can strengthen your cash flow and help your business to thrive.

Damon Walford is managing director of invoice finance at Aldermore Bank.

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