If left unchecked, several dangers could even result in the closure of your company.
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- The dangers of overtrading and the consequences for your company
In this article, we will outline the risks and what to do if your company is facing financial trouble. Overtrading typically occurs when a business grows at a staggering rate.
What are the symptoms of overtrading?
Suddenly, the business requires new resources, such as increased staff, stock and, perhaps, even more office and warehousing space. A shortage of the resources may mean you are unable to deliver on contracts.
If you cannot deliver on contracts you will not get paid and may even be liable for a counterclaim for any losses arising from your failure to deliver. This can respectively lead to an inability to pay for company liabilities, thus resulting in tax arrears and a possible breakdown in creditor negotiations.
A lack of a solid business forecast is a cause for concern.
Updated Jan 6, What is Overtrading? Overtrading refers to the excessive buying and selling of stocks by either a broker or an individual trader. Both are entirely different situations and have very different implications. An individual trader, whether working for themselves or employed on a trading desk by a financial firm, will have rules about how much risk they can take, including how many trades are appropriate for them to make. Once they have reached this limit, to continue trading is to do so unsoundly.
What can cause overtrading? Often, seasonal trends can prove costly for businesses and proper forecasts must be put in place to account for this.
Company resources at specific periods in the year, or a sudden increase in a particular stock, may need to be dealt with. For instance, even a late payment of one day to your overtrading signs tax can incur penalties, and significantly reduce your working capital.
Classic Symptoms of Overtrading
Statistics of company insolvency Overtrading is responsible for a large number of company overtrading signs in the Overtrading signs, most notably Carillion.
To add to the problems, borrowing spiralled out of control to an average of million in More information can be found on the dissolution of the construction company here. Carillion is just one example of a company failing to provide a realistic business forecast. The latest insolvency figures for Q1 in tell a similar tale. The total number of insolvencies in Q1 are at their highest since Q1 indriven by an increase in creditor voluntary liquidations and, in the case of Carillion, compulsory liquidations.
Lack of cash flow A company that repeatedly has to dip into an overdraft and borrow cash regularly is a warning sign. Small profit margins Often, we see companies that cut costs and, subsequently, profit margins in an attempt to improve sales.
As you reduce your profit margins, you are making it ever difficult to sustain a business — especially in a rapidly changing marketplace. In the long term, you may even hinder your company as you will have to work harder to initially gain sales.
Excessive borrowing As mentioned above, excessive borrowing will alert your lenders to financial difficulties. Borrowing money to pay invoices and suppliers each month is certainly not sustainable.
What can cause overtrading?
In some cases, the banks may even ask for a personal guarantee from the directors, thus putting you at risk of any liabilities. Loss of supplier support Initially, most suppliers will be happy to provide additional resources to meet demand.
Not necessarily. There is something called overtrading which is a serious problem to watch out for.
However, if you begin to fall behind on payments, they may reduce your stock — further complicating your situation if you are without resources, and suppliers to help. Essentially, your company will lack working capital and the supplies to carry on.
If you believe your business is facing this issue, you must seek immediate debt management advice. How to avoid overtrading Be aware that insolvency occurs when there are insufficient resources to pay debts as they fall due, and the number of liabilities exceeds the assets.
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Therefore, keeping an eye on cash flow is critical to maintaining a healthy business. You must also ensure that you prepare regular and realistic business forecasts, taking into account historical and competitor records.
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Lease assets Leasing the required company assets may free up some available cash flow, particularly as you are not buying them outright. However you should always consider whether buying second hand equipment at a reduced price would also cover the issue. New payment terms You could attempt to negotiate new payment terms with your suppliers and creditors, in an attempt to provide your company with breathing space.
However, if you habitually offer late payments — you must be aware that your creditors could issue a winding up petition to recoup their losses.
Similarly, we suggest seeking immediate advice to ensure you avoid insolvency and, possibly, the closure of your company. Our business rescue experts can discuss your concerns and provide ideas and advice to find a solution simple and affordable binary options your cash flow issues.
Alternatively, we can advise if you are already facing the early overtrading signs of overtrading signs.