Over trading

overtrade means engaging in more business than can be supported by the market or by the funds or resources available.

There are usually two situations which can create temptation for overtrading:

a. Your business idea has kickstarted well with more than expected reception from the market. Though you have limited resources in working capital, and human resources, and infrastructure you are already mothful and more orders have to be addressed. Your marketing efforts are paying off extremely well, your creditors seems to be happy with you and have indicated tosuppor to your rapidly growing business. Your team is bubbling with enthusiasm.

b. You have been in business successfully for quite sometime. Earned your place through sheer hardwork, built a loyal team, supply chain, loyal customers, with a growth rate at par or slightly higher than the market growth. At this point you decide to triple your turnover. With the new found aggression your team is successful in converting your vision into orders.

Generally, overtrading happens in startups and fast expanding businesses. The most interesting fact is that those who practice overtrading do not even realise that they indulge into it, till such time the problem of overtrading snowballs.

The primary risk in overtrading is credits: Credit extended to the customer and the credit enjoyed from the vendors and suppliers. Most start ups and growing businesses have limited capital or reserves to handle the catastrophe due to unforeseen developments leading to crisis. These situations develop due to bad debts, delayed payments leading to higher financial overheads, gap between the inward and outward credit periods, etc.

One more risk in overtrading is resources. As long as the order books donot exceed the limits of the installed capacity in the case of manufacturing units, and the available or hireable resources in the service sector, the situation is manageable.

Even if new human resources are hired,  to train the less experienced or to tune the newly hired but trained hands to the new business environment will be most demanding and time consuming.

Resources that need to be in place for phenominal growth include skilled and trained human resource, availability of raw materials, timely delivery by vendors, infrastructure like space, machineries, power, monitoring sytems and management etc.

Biting more than what can be chewed can lead to dissatisfaction of the customers both new and existing, exerting a lot of strain to all the departments leading to drop in overall quality and efficiency.

The greatest of all resources is time, which gets reduced in in each delivery irrespective of the product or service, possibly leading to poorer quality or post sale support.

It is paramount to take stock of cash and other resources, availability and manageability of all of them periodically, which will ensure that the business is not put into serious trouble with possible overtrading.

Growth is one of the most important aspects of business sustance, but not at the cost of the very purpose of it.