Effective debt management and credit control can help you avoid overtrading. In addition to managing debt more effectively and improving credit control, you should also think about changing some or all of your business practices.
Consider the following business practices to help reduce the risk of overtrading.
1.Set new payment terms
You could renegotiate payment terms, or tell customers that new terms will apply for future orders, but you should be aware that customers may object. Much will depend on the strength or weakness of your competitive position.
2. Offer discounts for prompt payment
This can be effective in accelerating payment, boosting cashflow and reducing bad debts. However, there are disadvantages - it can be expensive and must be policed to ensure that customers only take discounts when they pay promptly. See invoicing and payment terms.
3. Encourage automated payments
Automated systems of payment should be encouraged over more traditional methods such as sending cheques by post. Using systems such as BACS or CHAPS will prevent the risk of bounced, missing or lost cheques and have the advantage of providing payment certainty. Read about BACS payments.
4. Use factoring or invoice discounting
Factoring involves selling your invoices to a specialist finance company which takes on the administration and cost of recovering the invoice payments. With invoice discounting, you raise a loan from a finance company against the value of your invoices, but you keep the responsibility and cost of recovering invoice payments. See factoring and invoice discounting.
5. Negotiate payment terms with your suppliers
You could try to negotiate different payment terms with your suppliers. Simply taking longer to pay may be considered unethical, and you may find that some suppliers refuse to supply you if you habitually take too long to pay. Businesses are also entitled to charge interest on late payments.
6. Improve your stock control
It costs money to hold stock and raw materials, so turning them over more quickly will cut costs.
Faster stock turnover means that there will be a shorter interval between the time that you have to pay your suppliers and the time that your customers pay you for the same goods.