It’s been a tough few years, but hopefully things are at last looking up. Orders are starting to come through and the business world looks a much rosier place.
But whilst a sudden upsurge in demand seems like great news at first, sometimes it can have a negative impact on a business. A long line of customers doesn’t necessarily mean a healthy bank balance. When a business struggles to find the resources or cash necessary to service new orders before customers pay trading can be brought to a juddering halt, stopping the successful delivery of the firm’s products or services. It’s a very common problem which arises when firms expand rapidly, and is known as “overtrading”.
Very often raw materials need to be bought, and staff and other costs paid before goods are delivered to customers. Allowing for credit periods – and customers paying late – may mean a struggle to pay suppliers on time. That, in turn, leads to the business being placed “on stop” by those suppliers. If it can’t get the materials, it can’t finish orders, which means it can’t issue invoices, which means it doesn’t get paid. Threats of legal action become actual legal proceedings. Court judgements impact on the company’s credit rating and it all becomes a vicious downward spiral.
Even if the business survives its reputation takes a knock if quality suffers or if the business fails to deliver on its promises.
So a bursting order book is not necessarily as attractive as it may seem at first sight. Taking on too many contracts can actually slow things down.
That’s why it’s vital to plan ahead and organise your finances. Cash flow planning is essential. Project your monthly sales, predict when customers will pay (not forgetting that some will pay late), and factor in a reserves for contingencies.
Most importantly, if finances look as though they’re getting tight, take advice. Our Team of highly experienced corporate recovery and insolvency professionals have seen these problems – and others – many times.