Many small businesses have fallen into crisis and distress after a long period of decline and underperformance. Some of these businesses actually have significantly increased sales and higher profits. However, these companies could actually become the victim of their own success. This could happen when they have an excessive rate of growth, which leads to overtrading. In a simple financial sense, overtrading is a condition when a business trades beyond a level that its resources are able to support. This could happen when small businesses are in a situation where rapid growth is unexpected. The trade volume can be so high that they don’t have the working capital to cover the purchase and sales cycles. They may not have the financial capability to purchase the raw materials, run the manufacturing process and cover for the gap between the delivery of products and the actual payments.
One fundamental method is the ability to run a highly successful business, while balancing the short- and long-term requirements to properly generate profits. Long-term financial requirements may include the reinvesting of profits into the expansion of the business. It is important to make sure that we have satisfied customers that can ensure profits in the future. When growth is too high, a small business may have a tight cash flow that can’t support the higher expanding infrastructure. In this case, business owners may need to balance the existing resources and its business growth. Even banks and other lending organizations may not be able to provide higher amount of loans due to specific internal regulations. This makes it even harder for companies to raise enough finance to expand in the future. The problem can become even more complicated when clients typically make late payments.
In order to prevent overtrading, business owners should find out whether their company has started to grow beyond the capability and capacity of its existing system. However skilled they may be, a small management team can be significantly stretched by the excessively rapid growth. The scale of operation can be quite significant and things may run out of control. Growth is actually one of the risk factors that we need to consider and in some cases, it can be quite substantial. A small business may win a very large business contract, causing its sales turnover to go up by more than 300 percent overnight. In a normal situation, a small business could handle orders and sales with only 10 people; but a few large orders could overwhelm them in an instant.
The risk of overtrading can be minimized by having a scalable management structure that contains proper job specifications and delegation of powers. Present and future needs can also be balanced and the business must be able to move forward. If a company seeks to double its sales turnover, they should have some buffer capacity to deal with unexpectedly higher demands. This will ensure the fulfilment of business operations and overall customer satisfaction.
