By Mike Kienlen, Partner, Armstrong Watson

AS more and more businesses look to reopen as we exit lockdown, what your business looked like before the COVID-19 pandemic may not be what you are looking at as we exit lockdown. For business owners in that position, overtrading is a real risk.

Overtrading occurs when a business expands too quickly without having the resources in place to support that expansion. It is a common cause of failure of start-up businesses and those which are growing, as it usually happens when work is taken on but without the business owners necessarily thinking through how they will be able to deliver that work.

Many business owners will be at risk of overtrading as they start back up again as they look to re-establish their business at similar levels of trading as prior to the pandemic starting, however, having the resources to manage pre-pandemic levels of trading, especially when you have to take into account the social distancing measures that are now in force, may be unachievable.

If you have orders but are struggling for cash, then you may be at risk of overtrading, however difficulties managing cash flow do not mean that the business is in financial trouble. Often, the business owners are not disciplined enough with managing their cash collection and payments out but as we exit the lockdown, this will likely prove to be a key skill.

You may also be at risk of overtrading if you have inventory which you have not being able to convert into work in progress and/or cash. This will be prevalent in many manufacturing and retail businesses at the moment, with the supply chain having been interrupted whilst the business has not been able to convert stock to cash.

Cash management will continue to be a vital tool. Maintaining a short term cashflow forecast on a rolling 13-week basis will assist you in monitoring what collections are due in, what invoices can be paid, and when and where your focus on managing costs should be. Whilst you may now wish to pay all of the liabilities outstanding from both before the lockdown and during it, you will still need to manage payments whilst your cash reserves are limited. Preparing longer term projections will help you to establish what the position looks like over the medium term and this will help with identifying areas which might need some costs management or reduction.

If you are struggling to manage your cashflow, having someone independent to look at it objectively can be a real benefit, especially where working capital is lacking. Please get in touch with Mike Kienlen on 07770 536214 or email for a no obligation initial discussion.