Preparing For A Business Boom

When businesses fail consumers may believe that the company concerned had trouble making a niche for itself in a competitive market, but sometimes the opposite is true, and this can be avoided by carefully reviewing financial information.

Leaders of new firms cannot know for sure if their products and services will be a hit with their target market. When they get a positive response from consumers it bolsters their confidence in their finished products, especially when orders start pouring in.

However, some businesses are a victim of their own success and draw up lots of new contracts at the same time, only to find that they are unable to meet the demands - which is termed overtrading. Overtrading is a real possibility for popular start-ups, and has forced many into bankruptcy.

Taking on too much, with too little

Whether your firm is at risk of this outcome due to demand for your products partly depends on the kind of business you are running. Ultimately, overtrading occurs when you do not have enough resources to complete orders. Firms working in the manufacturing sector are particularly vulnerable to this, as they often have to produce goods well-ahead of getting paid for them.

If a firm then sees a sudden influx of orders, beyond normal amounts, it may not have enough stock, cash or staff to deliver the goods and end up breaking contracts or getting into financial difficulty. To prevent this possibility there are some calculations that you can perform and information to take note of so your organisation continues to do well.

Forecast turbulent times

Pouring over paperwork is generally not a welcomed activity by some managers, who may struggle to make sense of the figures and terminology used within financial documents. It is extremely important that you look into these kinds of files as they hold lots of information that could see your business becoming a success, rather than a struggling firm, or worse. If you do not wish to hire someone to go through these documents, then you could consider embarking on a training course that will supply you with the basics and more.

Cash flow forecasting is a great way to investigate whether your firm has enough money to expand. Problems will be highlighted as these kinds of statements consider the cash coming in and going out of your firm, such as payments from and to customers or suppliers. Business ratios are another common way to get a realistic perspective on your accounts.

If you're concerned that you may not have enough stock to commit to orders then an 'inventory to sales' ratio will give you an idea of the size of your inventory compared with sales from a specific trading period. This allows you to see if you can complete orders or require more stock. Other ratios compare your current assets and liabilities so you're able to see which is larger.

Getting dues paid

Sometimes customers can take a long time to give you what you're owed, meaning you could face problems further down the line when you need the cash to order more stock or pay your own creditors. To check the extent of these kinds of delays then you might like to perform a 'debtor days' ratio.

This calculation establishes the length of time it takes customers to pay you, and is useful when it's compared to the 'creditor days' ratio, which works out how long it takes you to pay your creditors. So if you pay your debts well ahead of when your customers pay you, then your business may need more working capital to continue to perform well.