Manage Business Growth With Overtrading Problems

Overtrading and the problems it can create can be quite difficult to comprehend. Surely, if a business is selling many of their products and their customer base and profit are growing rapidly, how can this be a problem? Indeed, not only can it be a problem but in some extreme cases, it can lead to a business having to cease trading.

The fundamental reason why overtrading is a problem is that it can put a huge strain on the resources of a business, particularly cash flow. If turnover is increasing too quickly, then you may need to acquire more machinery or equipment to service the increase in customer numbers. It may even be the case that you need to move to bigger premises or a larger office with more storage space. 

Therefore, growth in sales will likely to be matched by an increase in the need for capital investment and other working capital. If the business does not retained profit to fund this rapid expansion then they attempt to borrow it. These borrowing facilities can be very costly. However, many new businesses which experience overtrading find themselves unable to obtain additional funds due to a lack of trading history and are forced to reduce the size of their operations or possibly 'throw in the towel' altogether.

Other costs that can cause huge drain on working capital when growth is too rapid are staff costs. With any expansion comes the need for increased numbers of employees. This can be extremely expensive for a business to fund, especially when combined with any increases in connected payroll taxes. In addition, if your sales are increasing quickly it may mean that you need to carry larger quantities of stock and thus more of your capital will be tied up in that inventory. Again, stock is like many other asset, if you own too much of it, it can starve other areas of the business which urgently need funds.

There are a number of precautions which one can take to prevent the potentially damaging effects of overtrading. Firstly, growth should be managed properly and with a sound understanding of how it will affect the working capital of the business. By producing sound monthly budgets, cash flow projections and monthly management accounts, you will be in a far better position to control the potentially damaging effects of rapid growth. Secondly, before you grow too quickly, look to secure increased funding. In other words, it would be a prudent idea to approach your bank and get the 'green light' for future finance to fund expansion, should you need accountants Southampton. Having this contingency finance at the ready will mean that working capital can be maintained and growth can be managed properly.

Lastly, to avoid the effects of overtrading, it might be a good idea to take the 'only what I need' standpoint. For example, rather than hold larger and larger sums of stock when you are growing, consider ordering your stock 'just in time' (JIT). This can reduce your stock holding costs considerably and again free up all that working capital held up in stock. Alternatively, only buy equipment which you really need or see if you can buy any second-hand equipment which will be cheaper but still do the job. Again, with everything you buy for you business, ask yourself the question: is this something I really need or just want?

Visit accountants Southampton, a firm of accountants and business advisors specializing in small business. Find out how we can help your business grow.

Why it is Essential Having a Business Bank Account

There are many reasons why a new business owner may forgo opening a business bank account and struggle on using their own personal account for their business transactions. Sometimes they simply run out of time, having focused on everything else and forgotten to open a business bank account, they suddenly realise that it cannot be done instantly and so opt to carry on using their personal account. Other times it is through lack of conviction, fear of business failure leads them to bulk at putting the business finances into black and white. Most often, though, it is in the mistaken belief that it will save them a little money if they do not have to fork out for business banking fees.

Not paying to have a separate business account can often prove something of a false economy, as, for the small amount that most business accounts might cost, a business can gain so much more than just a bank account.

The way that customers and other businesses with which you do business view you is very valuable; image is everything in business and having your business transactions move through a personal rather than a business account smacks of small time; your business is far less likely to be taken seriously and plenty of customers will be put-off by the impression of paucity it creates.

Trying to do business accounts when using the same account for personal and business finances has the potential for absolute disaster; even allowing for not making any important fiscal errors, the sheer time consuming nature of fussing around separating everything out will be very trying for most new business owners.

Make no mistake, HMRC will be watching you; there will of course be times when you will have to have contact with them, provide them with information etc. and other times when they will just be watching. Mixing personal and business bank accounts may cause them to look a little harder at you and your business, as it makes financial transparency more difficult to demonstrate at a glance. If the accountant Southampton wants to see that you are declaring everything you should, having to fight through hundreds of domestic transactions to locate those of the business will not endear you to them.

Business accounts can provide your business with more than just banking facilities; many banks will throw-in added extras, such as accounting software, deals on insurance and even offer the actual banking services free for the first year or more of business. They are also a great source of financial advice for the new business owner.

So, rather than viewing a business bank account as an extra overhead on your new business, perhaps you could look at it in terms of what it can provide in benefits for your venture. If a business bank account can help your business profile or simplify its record keeping maybe it is worth the effort of setting it up, if it can also help the authorities to look favourably on you and throw-in a bit of guidance and some cheap insurance to boot, well then maybe it becomes an essential to add to your list.