There can be many causes and contributory factors, but for manufacturing businesses a mismatch between sales and production cycles is often at the heart of an overtrading problem.
It follows that the problems can be at least reduced, maybe even eliminated, if the sales and production cycles can be matched.
If you are a trader, you may be able to hold stocks for a shorter period. If you are a manufacturer, you may be able to hold fewer components for a shorter period and speed up the manufacturing process.
It may be helpful to employ just-in-time (JIT) techniques. As the name suggests, this is where goods and materials are delivered just in time for you to use them. JIT systems can help you with:
- shortening the manufacturing cycle
- reducing the period that you hold stock
- reducing the need for working capital
However, JIT systems may not be easy to establish. One problem is that there are no obvious benefits for your suppliers. Indeed it could be a disadvantage for them, because they will probably have to invest in new systems, hold stocks themselves and make frequent small deliveries.
For this reason, JIT often works best when you are able to work as a team with your suppliers. To achieve this you may need to give them something in return, such as guaranteed regular orders or even on-delivery payment.
A potential disadvantage of JIT is that you are cutting down your margin of safety. You will need to ensure you have good systems, good planning and reliable suppliers if it is to work.