Overtrading- When Businesses Become Victims Of Their Own Success

The perception of turnaround is that it involves a company which has fallen into distress and crisis as the result of an inexorable process of underperformance and decline. In fact a large proportion of the cases that we at GPS actually work with are businesses which are actually doing very well in terms of increasing sales, and sometimes even profits and the issue here is where businesses have become victims of their own success as excessive rates of growth has led to overtrading.

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Dealing With Financial Overtrading

Overtrading is often thought of purely in its narrow financial sense as being where a business is trading beyond the level that its finances can support. And this is often the case in high growth businesses where, if the terms of trade are such that the working capital cycle requires funding to cover the gap between terms of supply and receipt of cash from customers, an increase in turnover is inevitably going to demand an increased funding level.

Worse still, one of the fundamental tricks of running a successful business is that of being able to continually balance the short-term requirement to generate cash and profits now; with the long-term requirements to be continually reinvesting cash and profits into the future of the business to ensure you have satisfied customers (and hence profits and cash) into the future.

For the reasons already outlined, the short term cash position is likely to be very tight in a high growth business, while the need to support the rapidly expanding infrastructure of the business will usually require long term reinvestment of time and money. So the apparent conflict between these two imperatives will often be at its greatest at this stage of a business’s growth.

While some types of finance are better placed to deal with this issue than others, this is a problem which some businesses are running up against at the moment as they try to grow due to the difficulties they are finding in raising finance. While we can help in raising finance and have access to sources of equity that may be crucial in providing finance, we also find that looking at the causes of the funding gap is also a vital exercise.

By working on reducing the causes of the funding requirement, such as by reducing stock levels using lean techniques, improving debtor days by improved credit control, or renegotiating supplier terms, the business’s borrowing requirements can sometimes be substantially decreased for the given level of turnover.

Dealing With Management Overtrading

But high growth business are often overtrading in a much wider sense, in that the level of business has grown beyond the ability of the existing systems, processes and often people, to support.

Very rapid growth can very rapidly stretch a small management team, however capable, as the scale of the operation can quickly run out of control. And some growth that businesses have to deal with can be truly substantial. One client in a niche area of temporary staff saw rates of growth of over 10% per month. In another case, through winning a single large contract a business saw its turnover go up by 300%, more or less overnight.

And this type of substantial growth will inevitably call at some point for a step change in the management approach required. A sole entrepreneur may well be able to deal with ten, twenty or more staff, but by the time the organisation is ten times the size, the business will, if it and the entrepreneur are to survive, need to have moved to a formalised management structure, with all that will entail in terms of delegation of powers, job specifications, management information and reports.

In addition, as well as balancing the present and future needs of the business, the management of a high growth business will need to try to balance the pace of development and change across each of the different areas of the organisation, so the whole of the business moves forwards as simultaneously as possible across all of its functions. As an example, if a company employs 50 people and is looking to double its turnover, as sales expand it will have to expand the fulfilment side of the business, production and delivery, as well as ensuring it has sufficient financing facilities to avoid financial overtrading.

But it will also have to look at how much its back office administration may need to expand as well to cope with the extra paperwork, perhaps its accounting systems may need upgrading to handle the increased functions, perhaps it needs more staff, who will need to be recruited and trained. As staff levels rise, it may need to expand the management team to include a dedicated personnel manager to look after this function of the business. With the increased numbers may come a need for new premises, and so on.

Turning Around A Successful Business

GPS has a somewhat ‘holistic’ approach to business turnaround as we believe that businesses generally need to aim for a consistent approach to their recipe (or value proposition in management jargon) across all parts of their business. If a company is looking to deliver a high quality service to their clients then they are likely to need to invest in high quality and well trained staff, with good systems to back them up to deliver the service offered.

If the approach is to give the lowest cost service, then the business is unlikely to want or need a prestigious office block from which to operate. The analogy we use with some businesses is that, the faster they are running, the easier it is to trip up; and at speed, the slightest stumble can lead to a catastrophic fall.

So, stretching the analogy to breaking point, we see our role as to run alongside the business as soon as we start to see them stumble, getting up to speed as quickly as possible to catch them before they fall and to steady them, to keep them on their feet so they can recover their balance and get back to winning the race. So if you are a high growth business which finds itself in need of a friendly hand to help you through a rough patch, to raise some finance, or assist you in a step change in the business, please contact GPS for real business support.