How do I avoid cashflow fluctuations and the risk of overtrading?

We’ve had a great early summer selling a Japanese gadget, which I started importing last year, to the extent we were guilty of overtrading. This has left us with cashflow issues. We had increased orders four-fold, and have grown our warehousing capacity and packing staff. The trouble is that during the time that elapsed as we waited for the next shipment, we have been losing money, and recent sales levels have not returned to the heights of a few months ago. Fortunately, a couple of other products sell steadily and this has been the main reason we have stayed afloat. It’s easy in theory to deal with such fluctuations, but I’d appreciate any practical tips to avoid the same thing happening in future.

A. Anthony Cook writes:

Most businesses tend to learn pretty quickly that ‘cash is king’, and disciplined management of cashflow is critical if you’re going to avoid overtrading.

First, your accountant should be able to help you understand your working capital requirements. Ask for a cashflow forecast, looking ahead as far as is practical. Ask your accountant to calculate key ratios in your management accounts, specifically credit days, debtor days and stock days – these will help you to get to grips with your all-important working capital cycle.

Once you understand this, consider implementing changes that will help you to generate cash. As you’ve been losing money with lower activity, consider ways to change your fixed costs into variable ones. This could include putting your packing staff onto temporary or zero-hour contracts. Also try to build a relationship with your overseas supplier. For example, are you able to negotiate lower purchase volumes in return for repeat business?

There are also measures you can take to release cash. Your debtors will be making demands on available cash, so offer your customers a discount for early invoice payments. Speak to invoice factoring and discounting companies to see what options they are offering – the cost may be worthwhile. Furthermore, if some of your customers are worse payers than others, consider ‘firing’ them!

You will also have cash tied up in stock. This can be liberated by reducing your stock levels, perhaps by discounting or even selling products at cost. It’s worth talking to your suppliers and trying to negotiate better credit terms. Many companies simply stop paying their bills on time!

Additionally, you should contact your bank. You may well be surprised about what they can offer you. For example, a Letter of Credit from them may allow you to secure better credit terms with your overseas supplier. You can also discuss what additional borrowing facilities are available, such as an overdraft or even a loan. Currently, you may find that the interest rates are affordable and the cash injection could buffer your company against any short-term cashflow problem.

Anthony Cook is the founder and chairman of £7m turnover business Mobile Fun, Anthony Cook has 10 years’ experience within the mobile phone and e-commerce sector.


(will not be published)