If you're a business owner or an entrepreneur, you might have experienced the thrill of landing a huge deal or seeing your sales skyrocket almost overnight.

The sense of accomplishment and the rush of excitement can be intoxicating.

But what if I told you this rapid growth could actually put your business at serious risk?

In this week's Numbers Knowhow podcast episode titled "The Growth Trap: Avoiding Overtrading," I’ll guide you through the treacherous waters of rapid growth and help you avoid the pitfalls that could lead to financial disaster.

We'll explore a hidden danger—overtrading—which can creep up on even the most profitable businesses and leave them in tatters.

In this episode, you'll learn about what overtrading really means and how it can manifest in your business operations.

Foreign.

Most business owners, including myself, aspire to growth.

But did you know that growth, specifically rapid growth, can be

a very, very dangerous thing? In this week's podcast, I'm going to

be diving into this crucial topic of growth, specifically how

rapid growth can lead to a hidden danger called

over trading. Is it trapped that even businesses that are

profitable can fall into, with the disastrous

consequences that follow?

Let's set the scene. Imagine you're building your business, your emotion,

your drive, your passion. You're pouring your heart and soul into it. And

growth is that ultimate goal, that ultimate aspiration,

right? After all, if your business isn't growing, it's probably going

backwards, it's falling behind. But there's a twist in the tell.

Uncontrolled and rapid growth can wreck even the

most promising ventures. Now, this brings us neatly to this topic of

over trading. What actually is it? Well, in simple terms,

it's when your business takes on more than it can handle, both in

financial and operational terms, or a combination of the two.

Imagine revving your car engine so hard that it blows up.

That's similar to over trading. Now, to explain this,

let me share a story. I'm going to introduce Serena. Now,

Serena say four years ago she started a boutique

business making high quality bags. Things were steady,

turning over £250,000 a year with a

£30,000 profit margin. She has an overdraft facility of

20,000, just in case those unexpected bills come in.

Just in case demand is low. But those bills have still got to be paid.

Those overhead and running costs have still got to be met. And then one day,

that dream deal comes along. A big major retailer

puts in an order for £50,000 worth of her bags every

month for the next two years. That's got to be exciting, right?

It's the kind of moment that many business owners and entrepreneurs dream

about. Let's see what happened next. Now, to meet the demand,

Serena orders more materials, takes on more staff

and ramps up the production line. By month two, the first

batch has been delivered. But there's a catch. Her payment terms

will the retailer are an eye watering 70 days. And

that's over two months before Serena will see any of that money

in her bank account. Meanwhile, her suppliers want to

be paid sooner. They've got their own bills to pay. They don't want

to extend their credit terms. So Serena goes to the bank and asks

to increase her overdraft limit. They agree initially, but by

month three, their cracks are forming. Suppliers

aren't being paid on time, that cash isn't coming in, they're

stopping deliveries now of the materials required to make those

bags. Legal threats are piling up and a bank, getting a

bit jittery, a bit nervous, refused to extend the

overdraft. Serena's business is now in serious

trouble. This everybody is overtrading in

action. It's what happens when growth outpaces cash

flow. Now, there are trigger signs, there are warning signs. These

include cash flow struggles. Materials are being

purchased, staff are being paid. You want to keep the lights on, but the

revenue, the cash flow isn't coming in fast enough to

meet that cash outflow. Secondly, you're over

investing in resources. You need to buy more equipment, you need

to stock up with more inventory, you need additional staff,

otherwise you're not going to be able to operate and those reserves are going

to quickly diminish. There are going to be tensions with your

suppliers. Those suppliers you haven't been paid will

understandably want to be paid and they will, if needed, stop

working with you. A worst case, they will take legal action against you and

you're going to have that legal scimitar hanging over. Other

signs, there are going to be banking roadblocks. Lenders understandably

will be hesitant to extend credit when they see some instability.

And if they do advance credit facilities, they're likely to be more

expensive because they perceive the risk is much greater. And also

your profit margins will take a squeeze in order to fulfill those

orders. Those retailers, by the way, are going to be negotiating strong

and hard discounts. Increased costs to fulfill those large orders

will gobble away at your profits. Now, over trading isn't

just a theoretical issue. It's a very common pitfall, especially

for startups and those businesses that suddenly experience rapid

growth. Growth demands investment, not just in cash

investment, but also staffing resources to meet it as well. Too much too

for us and you create a cash crunch. Now, having

said that, how can we actually avoid it? Now, there are a few strategies

that Serena could have adopted. Firstly, negotiating her payment

terms, if she'd secured shorter terms, say 30 days instead of

the 70 days, the cash flow would have been more manageable. She might be

thinking, I can't go down that route of negotiating 70 days,

otherwise I won't get the business. Well, you need to be strong and

firm and make the case. Secondly, exploring the different

options for financing. Tools like invoice financing, financing or

factoring can convert those unpaid debts into

immediate cash. Instead of buying equipment outright, perhaps the

equipment could have been hired or leased. That working capital, that

central ATM of the business, would have been kept intact.

Thirdly, managing those supplier relationships carefully

by communicating with our suppliers, perhaps even asking them if

it were possible to extend the credit terms, making those payments on

time would have kept them on side during those busy periods. There were

two more bits Shisha could have factored in. Investing in a back office, support

the infrastructure, making sure she's got enough resources, for example, in the

accounts team. Having good, strong credit control, chasing payments

and keeping track of cash flow will be a lifesaver. A more critical

thing would have been to actually have done a cash flow forecast,

a cash plan. Having that idea of what the future looks like

in cash flow terms makes the anxiety much less,

and it makes it easier to take account of what lies ahead.

Now there's a key takeaway here. Growth isn't just about winning new

contracts. Adrenaline rush though it may be. It's about sustaining that

growth. And you need to track two critical numbers. Number one,

cash flow. The money coming in and out of your bank account on a daily

basis. There's a truism in business that you can sustain and

survive without making profits. But once you run out of cash or access to

it, close the lights as you leave the building. You will not survive.

The second thing to track is the working capital, and that's the flow of

inventory, supplier payments and cash. And these are the resources

available to cover the short term obligations like paying your staff,

paying suppliers, paying your bills, and paying yourself. If any of these

run dry, even most profitable business will collapse.

As we draw things to a conclusion, remember this growth is a

positive thing. It's the goal for most of us. And even if your ambition to

grow is not significant, remember, standing still means you're

going backwards. But growth has to be managed carefully. Take the time

to plan your cash flow, do those forecasts, access and secure

flexible funding options, and negotiate terms that keep the

balance in your favor. This is not a one directional conversation,

and if you're considering taking a major leap, ask yourself, do I have the

resources and the systems in place to handle it? If the answer is

no, it might be wiser to hold off, scale up more gradually, or make

that investment. If this episode resonates with you, well, check out the show notes for

links to more resources and until next time, stay savvy.