Managing Business Growth and Sustainability

Explaining the term overtrading and outlining the dangers presents to a growing business

Overtrading: This term can be understood in form of transacting more business than the enterprise current capital. It can be considered as working capital mismanagement. In order to meet an increased demand that exceeds a company's working capital can create financial and other types of business risks for cited company in future. It is actually a vicious cycle in which the financial distress and trading risks are occurred. Offering extended credit terms to customer strategy suggested by manager can be beneficial for cited firm in the context of getting more business, make customers happy and loyal, encourage them to spend more money and enhance trustworthiness (Rosenbloom and Dimitrova, 2011). However, along with several benefits some constraints which include negative cash flow, loss customers and high investment in managing account receivable that can influence business growth of given enterprise in cut throat competitive market.

For example, ABC enterprise wants to increase its sales. In this regard, manager suggests this strategy to increase sales and customer base. The main reasons behind taking this financial decision and increased stock line by around 50% are to attract new customers (Lilien, 2013). Enterprise is currently dealing in electronic market segment and also achieves growth in its business. Furthermore, to increase sales and customer base, ABC Company can also enter into mobile segment which is emerging market in modern era. Organization can attain these objectives using overtrading strategies but several challenges are also associated with implementation of this strategy at workplace that can be defined as follow.

Overtrading dangers and risks associate with growing business

Debtors: Increasing credit sales volume and extended credit term limitation steps which are suggested by manager can be dangerous for ABC Company in the long term growth perspective.

It will increase borrowing and excessive reliance on trade payables. For example, if broker on an investor behalf will excessive buying and selling stocks of company in order to enhance sales of company then it will create pressure on cash flow and working capital. For overtrading purpose, firm will require more money and in this regard, ABC Company will contract to financial institutions and brokers (Banerjee, 2006). They will also take advantage from this situation and extract high commissions form firm. This move will create collapse and insolvency kinds of issues for electronic manufacturing company. However, collection fees, added accounting and competitive advantages are the other major advantages associated with the increasing credit limit decision taken by manager of cited firm.

Cash: From overtrading activity, organization will be able to enhance its sales but its corresponding profit will not be increased. It will create burden on resources of enterprise. Besides that, lack of cash in hand and bank will also create issue for firm and affects it future business expansion strategy as well (Wallnöfer and Hacklin, 2012).

Inventory: In order to meet sales demand, enterprise will force to product more goods and inventory days will also increase. Due to this, length of working capital cycle will be also enhanced and which creates imbalance between sales volume and profit margin generation.

Liquidity problems: Internal causes which include poor management of operations, poor marketing decisions and production related issues can create challenge for ABC firm to maintain its liquidity in cut throat competitive market. For example, if electronic firm will more emphasize on overtrading activity then strategic decisions taken by management of organization such as marketing and financial activities negatively. Besides internal causes, external factors including economic and financial risks can also create challenge for organization in terms of survive in competitive market and meet expectations of customers in an appropriate manner. Aggressive expansion of business in terms of volume and physical infrastructure will create financial challenge for enterprise to meet its day to day business activities in a significant manner (Chewning, and Harrell, 2013).

Payment recovery: From the given facts and figures provided related to ABC firm, it is clear that currently stock days are around 60. But marketing manager has given suggestion to offer 90 day terms to all customers. Short term perspective, this strategy will be beneficial for organization but for long term concern, implementation of credit limitation decision will be not viable. It will create burden on financial and human resources of organization. In addition, it will also increase bad debt which negatively affect sales and profit margin of ABC firm.

Service of firm: When organization will concentrate on overtrading activity then quality of service which offer by company to its customers will influence. From the given case situation, it is clear that two thirds of the customers pay within the required 30 days and remaining pay money within 45 days. For example, if ABC organization will concentrate on overtrading activity then it will face problem in maintaining balance between price and quality that will create negative image of organization in the mind of customers (Eugene, 2014). Hence, it can be said that from growing business perceptive, overtrading can create financial, human capital and fail to meet expectations of customers within stipulated time related challenges at workplace.

Strategies required for overcoming negative impact of overtrading

As the change comes in economic climate and needs of customers, encourages new start-up and enterprises to expand rapidly. In the majority of cases, negative outcomes experience and cash flow issues occurs which affects sales and customer base from long term business and growth perspectives. In the context of overcoming negative impact of overtrading, it is responsibility of manager to take corrective action at right time to reduce chances of overtrading dangers in a significant manner. By taking help of professional accountant and using cash flow forecasting, manager of ABC firm can be able to mitigate chances of business risks effectively (Jhon, 2010).

Besides that, other strategies which include predicting potential late payments, projecting monthly sales and planning ahead for growth are the major steps that can be helpful for management of electronic firm. However, without understanding product life cycle and trends of market, firm will be unable to grasp business opportunity from overtrading activities (Chewning and Harrell, 2013). Despite of that, offering discounts for prompt payment, cost cutting, reducing distribution of profit and credit granted to customer kinds of strategies would be beneficial for enterprise in order to overcome negative impact of overtrading.

Illustrating the potential impact on the company’s finances in implementing the two new polices

Strategy 1: Suggestion of marketing manager to expand the stock line by around 50%.

Strategies suggested by manager have both positive and negative aspects as financial perspective for cited company. Expanding the stock lines recommended by manager can be beneficial for organization to increase sales and customer base (James, Leavel and Mainam, 2002). However, several other constraints such as bad debt, cash, working capital and inadequate spending money in research and development and other activities etc. also associated with the long term growth of firm.

From the given case, it is clear that sales of firm are around £6m per annum a gross margin of 30% and bad debts are around 2% of sales. From the calculation, viability of decision taken by manager can be understood in an appropriate manner (Jhon, 2010). Inventory Turnover Ratio can be helpful in this situation because its value indicates the number of times the inventory has been converted into sales. By calculating value of inventory, management of organization would be able to evaluate the efficiency of the firm in managing its inventory and check viability of decision taken by manager to increase stock line by 50%.

From the present case scenario, it is clear that earlier enterprise was required 60 days to convert its inventory into sales. But after increasing its stock level, enterprise will be able to enhance its sales and recover money in a quick manner. Calculated value of Inventory Turnover Ratio shows that if enterprise will extend its stock line by 50% then it will be able to recover its money in 40 days. Hence, it can be said that decision taken by manager will be viable and profitable for organization in terms of growth perspectives and converting its assets into sales quickly. It can be recommended that manager should be considered this strategy to generate cash and recovery of money in an appropriate manner (Wallnöfer and Hacklin, 2012.). By taking this strategy, enterprise will be able to attain its main goal which is related to increase sales of company.

Strategy 2: Suggestion of marketing manager to increase credit limit of firm

From the given situation, it is clear that two third customers of enterprise pay within the required 30 days. On the other side, remaining customers pay amount with an average 45 days. Total average of customers return can be calculated as follow.

Earlier, total 75 days were required to collect cash from customers. But as per the new suggestion provided by manager regarding to increase credit limit to 90 days from 75 days that will be not viable for cited firm. Due to, 15 days gap and delay in payment received, working capital organization will affect (Guilding, 2007). From this decision, organization will unable to achieve its short term objectives as well as problem will also raise in attaining corporate goal and aim of increasing 5-7% sales of company.

Increased time duration and 2% bad debts were associated with sales will restrict sales of enterprise at 2-3%. Furthermore, 8% interest rates charged by company will also decrease sales of organization. From the given preset case situation, it can be said that earlier, enterprise was able to generate cash in 75 days in a quick manner. But after increasing the credit limit, interest rate 8% will be associated with return amount also. Due to this fact, in 90 days, management of ABC Company would be unable to get return in quick manner. Earlier, customers pay money in 75 days but due to increase time limit which is 90 days, they will pay money late which directly affects growth and operation of company (Banerjee, 2006).

Hence, it can be interpreted that new strategy suggested by marketing manager of firm will create negative impact of sales and day to day business operations of organization. From financial perspective, it is clear that manager of ABC Corporation should not follow this business strategy in order to increase sales. However, along with several disadvantages associated with this strategy from financial aspects, some positive aspects will be occurred if this strategy will implement at workplace. The positive aspects of credit limit expansion can be seen in terms of increasing customer base and maintaining better relationship with customers for long time period (Lilien, 2013). The other benefits of implementation this strategy are credit flexibility provided by company to its suppliers and customers which make them liable and loyal against firm. On the basis of both positive and negative aspects, it can be interpreted that from financial perspective decision regarding to increase credit limit will not be good for ABC enterprise in long term aspects..

Conclusion

On the basis of given case situation, it can be recommended that strategy one related to increase stock level by 50% will be beneficial for organization. In terms of financial and customer’s perspectives, by applying this strategy, manager would be able to enhance sales and customers base in a significant manner. On the other side, new strategy taken by manager regarding to increase credit from 75 days to 95 days would not be viable for ABC enterprise in the context of gaining financial advantages form long term aspects. However, from customers and suppliers point of views and maintaining better relationship with them, this strategy will be helpful for company in cut throat competitive area.

References

• Chewning, E. G. and Harrell, A. M., 2013. The effect of information load on decision makers' cue utilization levels and decision quality in a financial distress decision task. Accounting, Organizations and Society. 15(6). pp. 527-542.
• Day, A., 2005. Mastering Financial Mathematics with Excel: A Practical Guide for Business Calculations. Financial Times/Prentice Hall.
• Guilding, J., 2007. Financial Management for Hospitality Decision Makers. Routledge.
• James, J., Leavel, H. W. and Mainam, B., 2002. Financial planning, managers, and college students. Managerial Finance. 28(7). pp. 35-42.
• Jhon, K., 2010. Financial Management Revised Edition. Routledge publication.
• Lilien, L.G, 2013. Principles of Marketing Engineering, 2nd Edition. Decision Pro.
• Rosenbloom, B. and Dimitrova, B., 2011. The marketing mix paradigm and the Dixonian systems perspective of marketing. Journal of Historical Research in Marketing. 3(1). pp.53-66.
• Wallnöfer, M., and Hacklin, F. 2012. The business model in the practice of strategic decision making: insights from a case study. Management Decision. 50(2). pp.166–188.

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