By Jeff Macklin

Overtrading is the term used to describe the process whereby a business agrees to fulfil more work than it is actually capable of. For a manufacturer for example, this may be due to an inability to produce enough products. The company will be required to outlay significant funds to buy in raw materials and cover running costs, however it won’t receive payment for the products until later that year. This creates a significant cashflow problem!

With the right approach, there are a number of actions that can be taken to avoid overtrading. Firstly, make payment terms a central part of the deal with your customer and make sure those terms are enforced. Sometimes a good deal is not the amount of cash which is generated but how quickly the money comes in. If the payment terms are bad you might not see the money for months and this might affect your ability to operate. With some clients you might therefore want to ask for the cash up front.

Make sure you invoice as soon as possible and that it is clearly addressed to the person who can authorise the payment. In addition, have your bank account details on the face of the invoice so that it is easy for your customer to pay electronically. Make sure you understand your customer’s payment system, and importantly when they process payments. Chase up invoices the moment they become due, confirming when the customer will process your payment. It’s not rude to do this — it’s part of proper business practice and your customer will understand this (bear in mind some businesses do not to pay invoices until chased). Call again the day after the payment processing date to check that your payment was made. If it wasn’t, ask why.

If attempts to secure payment fail, contact the person that commissioned the work and ask for their help. You could also mention you will have to stop supplying them if you don’t receive payment immediately. In addition, you should send monthly statements to the person that authorised payment of the invoice and be prepared to walk away from bad payers. Do a cash-flow forecast and re-forecast regularly — at least every month. If things are changing quickly, every two weeks may be better. Don’t pay your invoices as soon as you receive them, but according to your payment terms.

Overtrading is never an easy problem to solve, but efficient cashflow is the lifeblood for a small business so don’t be afraid to chase customers for payment, or even to say ‘no’ if you’re asked to deliver an unreasonably large order. It could mean the difference between life and death for your company.

Jeff Macklin is managing director of FDUK, which provides experienced part-time finance directors to fast-growing businesses across the UK.

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