Whilst it’s always important to keep expanding and pushing your business, it’s essential not to overstretch your resources. When a company takes on business that they cannot support, this is known as overtrading. Not only can this lead to serious financial problems, it can also damage business reputation. With this in mind, it’s important to know how to stop overtrading in order to protect your business. These are the key steps to be aware of:
Define Your Trading Parameters
The first step in how to stop overtrading is setting out your boundaries and parameters. Think about what your goals are for trading, as well as the time and money that you want to put towards it. Determining parameters based on your current finances and financial predictions, will help you stay within your means rather than exceeding them.
Keep An Eye On Cash Flow & Stock Levels
Keeping an eye on your cash flow is an important part of how to stop overtrading as this is an indicator of whether or not you have the necessary funds to support your current transactions. The same goes for keeping on track of stock levels. Perhaps, you have a lot of capital tied up in stock and materials. Reducing your inventory could be a way to help free up cash for other operations in the business.
Consider Factoring Or Invoice Discounting
Factoring is the process of selling your invoices to a specialist finance company who takes control of the organisation and cost of recovering the invoice payments. This can be an effective method for raising funds to cover future trading and transactions for a range of different businesses.
Negotiate Payment Terms With Your Suppliers
Another top tip for how to stop overtrading is negotiating payment terms with your suppliers. Establishing good lines of communication with your suppliers is beneficial for both sides. By speaking to your suppliers, you may be able to negotiate payment terms that are more favourable to your current situation.
Encourage Automated Payment Options
Another often overlooked method for how to stop overtrading or at least help to reduce the risk of it, is to set up automated payments if you haven’t done so already. This includes methods like BACS or CHAPS. This will help to prevent the risk of bounced, missing or lost cheques, whilst helping payments process faster in order to free up funds more quickly and efficiently.
Don’t Be Afraid To Scale Back
If you are concerned about cash flow, resources and funds, then don’t be afraid to scale back your current operations. This will be better in the long run than overtrading and potentially causing serious financial loss. Whilst it might seem counterintuitive to turn down sales, being unable to support them can damage finances and reputation.
Knowing how to stop overtrading will help to prevent your business from running into difficulty. However, in the event that you do find your company facing financial difficulty, it’s important to act fast and be proactive. If you have any concern that your business is facing distress, please don’t hesitate to get in touch with our experienced team of business rescue experts for advice
