10 ways you can reduce the risk of overtrading

Are you overtrading? Spot the warning signs early and learn how to fix cash flow strain before it damages your business growth.

Learn how you can prevent the dangers of overtrading and the measures you can put in place to grow sustainably and protect your bottom line.

Overtrading may seem like a good problem to have in business. After all, landing a big contract means more orders and more sales. However, the risks of overtrading shouldn’t be ignored. A sudden rise in demand can seem great at first, but does your business have the financial resources to handle the influx of work?

Failing to put measures in place for sustainable growth can create cash flow issues, which is why we’re sharing 10 practical tips for preventing overtrading.

What is overtrading?

Overtrading happens when your business doesn’t have the resources – stock, staff, supplies - to fulfil orders before being paid. Even profitable businesses can struggle with overtrading if you don’t manage working capital effectively and you’re not prepared for the level of growth you’re experiencing. Whether you’ve just launched a start up or are an established business looking to expand, overtrading can happen to any business.

What causes overtrading?

At its core, overtrading is all about how much working capital you have to work with. If it’s all tied up in stock, then your business will struggle to buy the materials for the big order you’ve just received. Even though landing a major contract sounds like it can’t have any downsides, if your business doesn’t have the working capital at hand to manage the costs before you get paid, you can quickly run into trouble.

Rising production costs, delays in your manufacturing process, peak trading seasons or low profit margins can also result in overtrading, as they directly impact your cash flow. Late payments are another contributing factor, leading to reduced working capital as you wait for invoices to be paid.

Example of overtrading

An example would be a family-run furniture maker that lands a large order from a national retailer. Excited by the opportunity, the owner buys extra materials, hires additional staff, and pays upfront rental payments on a bigger workshop. Production ramps up, but customer payments are delayed. The stock levels are high, money is tied up in inventory, and there isn’t enough cash left to pay suppliers or staff salaries on time. Even though sales look strong on paper, the company’s resources are overstretched.

This is the risk of overtrading, when too much working capital becomes tied up in stock and unpaid invoices, leaving the business unable to meet payments in a timely manner. It’s one of the biggest dangers of overtrading, often leading to late payments, a damaged business reputation, or even the need for business rescue if customers fail to pay.

By understanding this early warning sign, businesses can take steps to prevent overtrading, maintain sustainable growth, and protect healthy cash flow.

Why is overtrading an issue and what could happen?

Ultimately, overtrading can lead to insolvency and a business failing. A shortage of cash and unsustainable borrowing can also negatively impact the quality of your service or products.