Overtrading Damaging Your Small Business

You may think that overtrading sounds like a good thing, but actually it isn’t - the key to a healthy business is to get a good balance between under trading and overtrading.

Overtrading can slam your small business straight into financial difficulties, which can obviously be a common problem in a recession - you can find that although you are getting a massive amount of work, it isn’t paying off as you would expect and you are struggling to stay afloat.

The problems occur when you have to pay up front for materials for example but you won’t be paid for the job until much later - you are out of money for too long and that can cause serious problems…

If you are worried that your small business might be overtrading read on to discover the signs and then make sure you do something about it;

Borrowing Money

If you find that you are constantly needing to borrow money to get by then you are possibly overtrading - borrowing money is fine from time to time, it is often necessary, but by doing it all the time you are giving off a bad image to lenders like banks.

Banks will not be happy with businesses constantly borrowing money, as they’ll assume you are crashing.  Banks will stop supplying you with credit and will instead start asking you to put up your own personal assets as collateral, which is incredibly risky.

Shrinking Profit Margins

One of the key signs of overtrading is a small profit margin.  Due to the nature of small businesses they are often found in crowded marketplaces and as a result are forced to lower their prices.

Lower prices mean smaller profit margins and the businesses cash flow is affected.  You are forced to juggle your money to make things operate properly, but when you’re spinning plates to keep them in the air it isn’t long before they fall to the floor and shatter so be careful!

Late Payments

Another sign of overtrading is when late payments have a seriously devastating effect on your cash flow - through a recession more and more customers are being forced to delay payments and if you are overtrading this can be catastrophic for your business.

If you want to avoid the effects of late payers then don’t be afraid to chase customers for money and be strict with payment dates - after all don’t forget you have earned this money and the customer has no right to delay paying you.

Accountant

You should think about employing a good accountant - if you are overtrading a good accountant will be able to notice almost immediately and will be able to steer your business back in the right direction.

Don’t rely on your own awareness, as you’ll probably be too stressed out to even realise what’s going on - it’s always good to have someone on board to lead you through a difficult time.

Overtrading?

Are you overtrading, especially through the recession?  Have you had to cut back to help your business?  Let us know…

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