Over-Financing, Overtrading and Over Investment
Over-Financing
Borrowing excessive amounts of money to finance your business is a route that many new start-ups, in particular, have taken – and failed. We all know that borrowing costs money (mainly through interest rates) and so it is important that you acknowledge these charges (including terms and conditions) whenever you apply for finance.
Increased borrowing can lead to bigger interest rates and tighter repayment schedules, consequently reducing your control of the business. If you take out any secured loans, your security (be it your home, business assets, etc) is always at risk if you fail to meet payments.
Visit our for help and information on financing your business.
Overtrading
Overtrading is caused when a business sells more than it is capable of selling with respect to its current cash levels. If payments are made precisely at the time of sale (i.e. no credit is offered), the risk of overtrading can be reduced. Where credit is involved, the effect it can have on cash flow can be disastrous.
Sometimes it costs to sell, i.e. for those customers that take credit, you do not have the money in your hand until it is paid to you at the agreed time (credit period). This may encourage the need for borrowing money through, say, loans or overdrafts to compensate. The pattern here is: more selling by credit leads to more borrowing.
This may seem normal to most businesses, but for those businesses that fail to meet payments on any money borrowed will face the consequences. Failing to meet payments may be influenced by your debtors failing to pay you on time…
Overtrading is more common with small businesses, particularly during their early stages where they seek and experience rapid growth: steady growth is the key.
For an example scenario of overtrading, visit our short article Insolvency by Overtrading
Over-Investment
If you have money in your business available to you for spending, you may immediately be tempted to purchase assets such as machinery, vehicles, premises, etc. This can often be a direct route to business failure. It is good management to have funds available at hand should any unexpected costs be incurred.
In conclusion, over-investing in assets can leave your business short of cash and further leave you unable to finance daily operations and unexpected costs (late payment interest, equipment breakdowns, tax demands, etc).
You should not see it as a shout to put a halt to your planned investments, but consider what you could possibly need the money for in the future. Budgeting could be the answer. If funds turn out to be not as favourable as first imagined, why not try leasing as an alternative to investing ?
Article Index
- Avoiding Cash Flow Problems
- Too Many Debtors and Creditors
- Over-Financing, Overtrading and Over Investment
- Poor Stock Control
- Related Articles
- Popular Articles in Cash Flow Control
