The dangers of overtrading
Strange as it might seem, impressive sales figures and even improved short-term profits do not necessarily indicate ongoing success for a business.
Often they can be a sign of overtrading, that eventually results in reduced cash flow and all the problems that implies.
These cash flow problems can be further exacerbated by the need to invest in new assets to facilitate growth, such as premises, vehicles, machinery, computers, etc.
Cash flow problems also arise because too much capital is tied up in stock such as raw materials, finished goods, or work-in-progress. One solution to this is to implement practices such as Just-in Time, and Kan Ban, which help to reduce capital tied up in stock and free it for use in more effective ways within the business.
But at the end of the day, the best way to avoid cash flow problems is to maintain good management accounts that will alert you to the dangers of overtrading.
We can help you set up and interpret effective management accounts. Contact us today to discuss how you can keep your business on a steady course.
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