There is help available! Protecting your business from the risks of overtrading

By Dan Morgan, Managing Partner, Haines Watts Esher

With lockdown restrictions continuing to ease in accordance with the Government’s roadmap, businesses will be looking at re-opening and rebuilding their trading. However, it is important to make sure that this initial surge in business activity doesn’t result in overtrading.

Overtrading is when the growth in your business becomes unsustainable because you no longer have the resources to fulfi l the demand. In particular, pressure on working capital could be a real risk. During the course of the pandemic if you have used your cash reserves to survive you may need to build up trade slowly to balance the credit given to your customers versus credit received from suppliers.

CONSIDER YOUR RELATIONSHIP WITH SUPPLIERS

Be careful when extending credit terms to your customers. If you allow credit terms of 30 days or more with customers but are on shorter terms with your suppliers, you could place undue pressure on cashflow. For example, if a business sells 100 widgets with payment terms of 60 days for customers but you have payment terms of 30 with your supplier, you will need to have suffi cient working capital to meet this 30 day gap. If you don’t have the capital already in the business to pay your supplier then you can quickly run into problems. Late or non-payments from your customers need to be monitored closely over the next few months, particularly in terms of how they will impact your relationships with suppliers. If a missed payment from a customer means you won’t be able to pay your supplier then you need to proceed with caution. Every business will be showing the same levels of risk aversion as you so suppliers are likely to be much stricter on their payment terms. HOW TO BOOST YOUR RESOURCES

Before your business re-opens it is important to conduct some resource planning in order to match your demand. Have a plan in place which is able to be scaled up or down depending on actual business activity. Some key considerations will be the amount of stock you’re holding, not having surplus raw materials and ensuring you have alternative suppliers if needed.

Staffi ng levels is also something which needs to be planned for. Many businesses I work with are only employing enough in-house staff to cover the work that they can guarantee will occur month on month and then if additional work comes in, this can be outsourced. HOW TO MEASURE IF YOU CAN KEEP UP WITH THE DEMAND

Accurate fi nancial forecasting and reliable management accounts will continue to be important as you re-open and rebuild. If you have a grip of your numbers you can begin to test various outcomes and measure how well you think your business will be able to cope with changes in a variety of variables. When looking at your numbers you need to factor in any loans you took out during the course of the pandemic. Deferred VAT payments will now be kicking back in and if you took out a Coronavirus Business Interruption Loan (CBIL) early on, then the 12 month interest free period will also be coming to an end. WHAT TO DO IF YOU THINK YOU MAY OVERTRADE

If you suspect your business is at risk of overtrading then the first thing you should do is seek advice from your accountant on the best way to inject cash into your business as trade picks up. There are a number of options that you may be able to explore from RandD tax credits, to invoice fi nancing, or asset fi nancing.

Invoice fi nancing in particular can be a great option for allowing for a steady return to business as it scales up alongside the level of sales you are making. If additional equipment will help ease the strain and you do still have capital within your business then now is an optimal time to invest due to the 130% super deduction announced in the budget.