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Many businesses are now seeing economic recovery take root, but this is by no means good news for all. If a small business has cut back on everything during a recession, it can experience sever problems when things start to pick up. This is why many businesses fail when you would have thought that all would be well. Why is that?

It’s all to do with subtle, but crucial difference between overselling and overtrading.

Overselling is generally good news. Your sales curve picks up, and you have adequate resources in hand (be they stock, spare production capacity, staffing) to fulfil the higher demand as it builds up. But even here, a business owner must remain watchful. It is important to know why there is sales improvement.

Is it because your customers are simply replenishing their own stock levels with your goods, ahead of an improvement in demand? If so, you might be in for a short-term surge in demand that is not sustained when the stock pipeline is full. So a business owner must remain in close contact with his marketplace to assess the true level of demand and plan accordingly. Otherwise there is a real risk of over-reacting to the recovery in demand and paying the price with over-expenditure later on. At best, the recovery will not be as profitable as it should have been. At worst, the business owner will be faced with real financial challenges before the right balance is achieved.

So overselling presents its own difficulties. It only becomes good news if it is properly managed, which is a challenge for the management team – one they must be alert to and, if necessary, trained for.

But when it comes to overtrading, the challenges are much greater. Why? Because it is caused by a lack of working capital to be able to tolerate a sales recovery. The last recession was the longest that many of us could remember. Many businesses struggled to survive and had to cut back sharply in order to do so. So when sales pick up, the danger is that one attempts to satisfy the demand without due regard for one’s cash position. Building stock, recruiting new staff, increasing capacity all require a substantial cash outlay well ahead of the time when customers will pay up. And if the business’s bank balance is stretched, this is when disaster can strike. Worse than that, there are severe consequences for business directors if it can be proved that they wilfully ignored the warning signs and ended up trading insolvently – which is ultimately what overtrading is all about.

Refocus Business Plans and Strategies

All this goes to show that business owners must refocus their business plans and strategies to cope with the economic recovery and stick to that plan once the dangers outlined above are past and sustainable growth is being achieved. It may go against the grain, but it may be appropriate to turn away demand in the short term so as to achieve a solid recovery.

There is no easy ride to economic recovery, and the smaller the business, the tougher the process of recovery can become if the right business decisions are not taken.

If you need help and advice with your business plan, contact CMC via this form.