Overtrading

Growing faster than your cash can support it. The reason successful businesses fail.

What it means

Overtrading is taking on more work than your working capital can fund. The order book is full, the margins are fine, and there is no money in the bank because everything has gone out on materials, wages and stock for jobs that have not been paid for yet.

Why it matters

It is counter-intuitive and it is common. The signals that usually mean "things are going well" — more orders, more staff, bigger jobs — are the same signals that precede this particular failure, so it is easy to celebrate right up until the point the wages do not clear.

Insolvency practitioners see it constantly: a company with a healthy profit and loss account and an empty bank account.

What it looks like in practice

A contractor who normally runs £50,000 jobs wins a £400,000 one. Materials and labour are due within 45 days. The client pays on certified valuations with a 30-day term and a retention. The company needs perhaps £150,000 of cash it does not have, to service work it has already won.

The answers are all boring and all have to happen before the contract is signed: stage payments, a deposit, a facility arranged in advance, or turning the job down.

What to watch out for

Signing before financing. Once the contract exists, the leverage to negotiate payment terms is gone.

"We'll be fine, it's profitable." Profitable and fundable are different questions.

Directors should also understand that trading while unable to pay debts as they fall due has personal consequences — see wrongful trading.

Where to get proper advice

Talk to your accountant before you sign, and to your bank about a facility while things look good rather than when they do not. If it has already happened, a licensed insolvency practitioner will give an initial conversation free, and going early is what preserves the options.