What is overtrading?Source: Other | | 23/02/2021
A reminder that traders who buy and sell goods – wholesalers or retailers – need to be wary of the financial consequences if, as expected, pent up consumer activity leads to a surge in demand for your products from July 2021 or earlier if you can trade before 21st June 2021.
What is overtrading?
Let’s assume that the past year’s disruption has meant you have run-through your cash reserves and you basically have little in the way of liquid (cash) resources.
If you suddenly start selling at volume, with no stocks to supply orders, you may have to buy-in product or raw materials to fulfil your customers’ demands.
Wages and other costs will have to paid and your suppliers may insist on tight payment terms.
If you are offering credit terms in excess of those allowed by suppliers, the demands on your cash flow may exhaust your reserves, as cash in from customers will not – initially – cover your outgoings.
Retailers who are paid at point of sale should avoid over-trading. Those businesses most at risk are buying and selling goods, have significant fixed costs to meet and offer credit terms to customers in excess of those agreed with suppliers.
Eventually, overtrading will fix itself as the profit your increased activity generates find its way into your bank account. But you need to work out if your cash flow needs support from you or your bank until this much needed profit reaches your bank account.
We can help. Producing realistic business forecasts will identify periods when overtrading may rear its head. Please call so we can discuss your options.