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Business Growth and Overtrading
Episode 8914th November 2021 • I Hate Numbers • I Hate Numbers
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Business Growth and Overtrading is one of the biggest problems facing businesses today,  Furthermore it impacts startups to established businesses.  It's easy enough to avoid if you know what signs look like but many companies simply don't have the time or expertise needed to spot them before they become an issue.

Are you looking for a way to grow your business? If you're reading this, then it's likely that growth is part of your landscape.  A word of caution, you want to do this as quickly and efficiently as possible. You don't want to be caught out by overtrading or having too much stock on hand because of poor planning.

Listen here for more information on how Business Growth & Overtrading can help manage growth effectively within your company!

Conclusion

Above all, Business Growth and Overtrading is a must know if rapid growth affects your business.  You need to put yourself more in control over your business. Listen to find out more. Furthermore, it doesn’t matter what size, shape or form your business is. You need to understand how holiday pay works… My podcast will help.

Listen to find out more, tap into more details at HMRC.

Furthermore, my mission is to inform, inspire and educate you to get closer to your numbers.

You can make more profits, save tax and time, improve your well-being and your money mindset.

Help me to help you and others by subscribing and sharing this episode in your network.  Listen now and subscribe to I Hate Numbers, so I can send it straight to your inbox every week with all the latest updates.

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Transcripts

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Growth is a perfectly natural thing for any business owner to want to do. And in fact, if you don't want to grow your business, if you have no aspirations to grow your business, your business in reality will be going backwards. However, note of caution, rapid growth that's unmanaged can lead to financial catastrophe

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even if your business is profitable. That situation, folks, by the way, of rapid growth, that links to financial failure, is typically categorised and described as overtrading. A nice bit of terminology just thrown in there at the beginning. In this podcast, I'm going to cover what overtrading actually is, what the symptoms are, the things that you have to watch out for, how it manifests itself, but more importantly, what we as business owners can do to actually prevent

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the disaster happening in our business from the rapid growth that’s not managed, or overtrading, as we're going to call it.

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

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Hi folks. Welcome to another weekly episode of I Hate Numbers, the podcast that has a mission to help improve your financial understanding, improve your money mindset, help your business make more profits, save tax, and time. What a fantastic combination we have there. So, let's crack on with the podcast. Now, growth is a perfectly natural thing, and if I draw on my own experience from over 26 years ago when I started my own business in my back bedroom, I had an aspiration to want to move out of that bedroom.

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I've managed to do that after 26 years, but I learned some lessons from that, and in terms from lessons I've learned from other clients who grow too quickly, again, if we don't manage that rapid growth, then that can be quite disastrous. Now, I'm going to point out and illustrate the overtraining by a little example.

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So, let's imagine Serena. Serena has a business that's 40 years old. She makes high-quality bags. She turns over about a quarter of a million pounds a year, and makes a profit on that of about 30,000 pounds. Yeah, she has access to overdraft facilities of about 20k. Now, a customer knows that her high-quality merchandise decides to enter into a contract with Serena, where they want her to supply them with high-quality bags for the next two years.

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The order is about 50,000 pounds a month, and the payment terms are 70 days after delivery. Happy days. That shot of adrenaline getting that massive order. Now, with the excitement, Serena obviously contacts her suppliers to make sure she's got adequate materials to fulfill that contract, and she wants those

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materials ordered as quickly as possible. She obviously has to recruit additional staff to cope with that additional order, that additional capacity. First month for business, everything ticks over quite nicely. All the materials are supplied, the bags are produced, and they are provided to the end customer.

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Month two goes by, still things are pretty good, and the first batch of bags are delivered to her customer. Now, in order to fund this, because remember, she's not being paid at the moment, she needs to contact her bank, and she requests an increase in overdraft facilities. Now, month number three, a couple of problems are creeping in

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now here. The overdraft is at the limit, and she's got now issues with the suppliers who haven't yet been paid. Those suppliers are feeling a little bit frustrated, and it's likely that frustration will manifest itself to them withdrawing their supplies to her, which is going to create a problem. Now, money arrives from the customer.

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She can pay some of the suppliers, not all of the suppliers. Some of the suppliers have now stopped delivering to her and are threatening legal action. Overdrafts are at a pressure point. Three suppliers are now instigating legal action against her because the cash flow isn't there. The bank, naturally, is being risk averse, doesn't want to honour any more payments coming out, and therefore, Serena is in a bit of a conundrum.

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Now, that situation is described, there is a typical symptom of overtrading. Now, the symptoms are cash flow suffers dramatically, you've got an investment that you've got to make in resources, like staffing, materials, potentially additional machinery to fulfill a customer order. It's likely you've got a high investment in inventory as a result.

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Now, potentially also, you may have a decline in your profit margins. The amount of time that you're waiting for customers to pay their bills is going to be problematic, and there's going to be a pressure on your internal infrastructure. Not good news. Now, those symptoms of overtrading are quite typical for startup businesses, and also businesses that enter a rapid period of expansion.

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In all businesses, we have to invest now in order to generate value in the future. But, with a rapid expansion here, you may have to over-invest, as such, cash flow becomes very tight, and therefore, that leads to major problems. Now, what can we do to actually resolve this, which is just as important here.

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Now, if Serena had actually managed to negotiate better payment terms, if she'd managed to access some funding, perhaps, there are ways that she could have secured invoice financing, factoring on those receivables. Receivables, by the way, guys, is a pause term to describe customer accounts. That cash flow would've been much better.

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She may have overinvested in when she has bought her machinery. You know, looking at a leasing option as opposed to a purchase option would relieve some of the pressure on the cash flow. Now, as a roundup here, what do we do going forward here? We manage our payment terms with our customers much more effectively, so it may have been possible to perhaps negotiate a discount, better payment terms.

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It may have been possible to negotiate better supplier terms there as well. And remember, in all businesses, you've got to make sure that you keep your suppliers happy. You've got to make sure that you pay your bills on time, and you've got to make sure also that you pursue and maintain your credit control quite tightly.

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In lots of businesses that I've seen that have grown very rapidly, they neglect to invest in the infrastructure, so the internal back office functions, making sure they collect those monies on time. Expansion itself, maybe, has an active step here, where you want to seek market share by discounting to gain that extra market share.

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Well, what that's going to do is going to reduce your profit margins, and put a big pressure on your cash flow. The two key numbers to keep an eye on, folks, is the cash flow in your business, and what's called working capital. If you check out the show notes at the end, we've got a previous podcast episode on working capital.

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But, look at it this way. In order to pay your ongoing obligations, your bills, as you go through, you need to make sure you've got access to cash resources, and that cash, that day-to-day operating cash comes from your customers, comes from money in the bank, and comes from the stock, or the inventory that you have that eventually turns into cash.

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That is your pot of money, your pot of resources to tap into, to pay your suppliers, to pay your staff, to pay your ongoing bills. If you don't have sufficient working capital, then your business is largely going to be screwed. So, what do I suggest going forward? Cashflow forecast. I'm a big fan, as you know, of planning, cashflow funding, looking at alternative ways to fund that business expansion.

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And sometimes, it may be that the time is not right to get that major contract, to secure that extra business if you don't have the resources and the referrals to invest and manage that growth correctly. Now, growth, as I said, is a positive thing. If you don't manage it effectively, then it can be counterproductive, and it can lead to financial catastrophe.

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Even if you're making profits, then your business will suffer. Folks, I hope you found that podcast useful. So, if you are growing your business, if that's your aspirations, good luck with you. Make sure you do a cash flow forecast. Make sure you manage your customer accounts effectively. Look at alternative ways of funding the assets that you might need to purchase.

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So, whether you look at a leasing option, or if you look at a renting option, manage your working capital effectively, and positive things will flow through. If you found some benefit from this podcast, I'd love your feedback. Feel free to subscribe. Share it with those who’ll get some benefit from that.

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And until next week, take care folks. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.

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