Business Obesity Can be Fatal
In the second of seven articles on the Seven Deadly Sins of Business Neil Debenham looks at Gluttony and how over-trading can ruin a business.
Just as a poor sales results orders can kill a business, so can having too many. Every business owner loves the idea of not having to wonder where the next sale will come from, but playing catch up with delivering on existing orders is no fun. When you have more business than you can deal with, you are over-trading and it could cost you more than a few unhappy customers.
The temptation of taking on a big order without a second thought is understandable. It’s like a dream come true. But think carefully about your ability to deliver it before uncorking the champagne.
Like many things in business, the problem with over trading revolves around cash flow and resources. If you take on too many orders, you will doubtless need to buy in more supplies or even hire more staff. These people will need paying, often before you get paid by your customer. You can, of course, use your working capital or your overdraft facility, but what if there is a delay from your supplier, you have to take on extra storage space or the customer delays payments?
The most famous example of over-trading leading to collapse happened in 2018 when the construction company Carrillion went bust creating the UK’s biggest ever liquidation with liabilities of £7 billion.
The company had expanded at an alarming rate through multiple acquisitions, taking on massive contracts at home and abroad. As payment delays and projects stalled, the firm found itself running out of cash.
The final report of the Parliamentary enquiry into the firm’s collapse noted:
“Carillion’s rise and spectacular fall was a story of recklessness, hubris and greed. Its business model was a relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers.
There are certain measures you can implement to protect your business from over trading.
- Try to secure favourable credit terms with your supplier. If your customer pays in 60 days, make sure your supplier will extend you credit over 30 days.
- Negotiate swifter payment from customers, perhaps offering a discount for prompt payment
- Always factor in a potential bad debt buffer ensuring that if one of your customers falls late with payment, this does not impact on your ability to deliver to other clients.
- If you need new machinery or other equipment to fulfil the order, consider leasing to avoid a large upfront payment
- Increase your working capital through a loan or cash from a new investor
- Look at alternative methods of finance such as factoring or invoice discounting
- Know your resources. Cash flow is one thing but know how many orders a day, week or month you can process with your current resources and never overextend this.”
Now for the confession: forgive me, Neil Debenham has sinned.
When I ran a outsourced administration company we over-loaded our system. We we’re dealing with around 150-200 cases per day in some instances but only had the capacity to handle around 60-70. We did this to protect our position as the market leader. We ensured that clients were unaware of our struggle to deliver or the pressures mounting internally but my staff felt the brunt of the greed. We arranged over-time and a 24hr operating pattern to clear the backlog. We had no time to recruit as the methodology behind what we did was complicated and allowed no room for error. Without the amazing team I had behind me, we would have lost our reputation and possibly our clients.
The other aspect of business gluttony worth mentioning here is over- extension by diversification. Of course, there are many good examples of how diversifying into a new markets has been a runaway success, Take Virgin, for example, who went from music to airlines, trains and media. But there is an equal amount of spectacular failures – business that took a diversification too far. Remember Coca Cola’s foray into the wine market? Or Dyson’s decision to take on the electric car sector?
The truth is that to operate in a completely different sector needs a lot of expertise and a lot of cash. I am not saying that seeking new markets for growth is a bad thing, just beware that it comes with a wealth warning as it zaps cash and takes your focus off your core business.
This advice is not designed to pour cold water on entrepreneurship. Business thrives on risk, but risk without insight is dangerous. Know the risk and have a plan should it all goes wrong and be prepared to adjust that plan on a daily basis. As the betting industry always warns: never gamble more than you can afford to lose.
If you have any questions on the issue on reputation or insolvency, you can contact me Neil Debenham. Drop me an email neil@neildebenham.com and follow me on Instagram , Twitter and Linked In or if you would like to read Sin No1: Lust by Neil Debenham please read more.
