Overtrading: Definition and Step-by-Step Guide to Avoid It

Rapid growth is a common goal for small businesses, as many companies look to build on positive market momentum and stretch toward broader success.

In 2022, the Small Business Credit Survey of 7,864 small businesses in the U.S. by all 12 Federal Reserve Banks found that 40% applied for financing, and 53% said their reason for applying was to expand their business, pursue new opportunities, or acquire business assets.

However, attempting to expand a business too quickly can put a strain on the organization – and even threaten its existence. It’s important for business owners to understand the risks that can come with rushing to scale, so they can proactively make informed decisions that promote sustainable growth.

This article explores the five main ways that rapid growth can be harmful to small businesses and provides strategies for avoiding these risks to ensure companies are able to navigate expansion successfully.

How to Spot and Correct the Risks of Dangerously Fast Business Growth

Growing too quickly can leave your business overstretched and struggling to meet its obligations to employees, suppliers, and customers. Also known as "overtrading" in the U.K., overly rapid growth often means the company has taken on more business than it can feasibly manage with its current cash, staff, production capacity, and other resources, putting the company at risk of financial instability.

Identifying the signs that a business is growing too quickly allows small businesses to take corrective action early to prevent the company from ending up on shaky ground. Here are five ways rapid growth can threaten your business, along with tactics for preventing these risks.

1. Cash-flow challenges

Cash shortages and uneven cash flow can be strong indicators of rapid growth problems. If the rate of expansion outpaces the company’s ability to generate enough revenue, business owners may struggle to cover day-to-day operating expenses and pay their employees and suppliers.

Managing cash flow was cited as the single biggest challenge for 62% of 19,675 U.S. small-and medium-sized businesses surveyed by Thrive Analytics in 2023 – an important consideration given that lack of capital is a common reason for business failure.

The strategic solution: For many businesses, late payments prevent growth because they place a strain on cash flow. To ensure your clients make timely payments, consider negotiating early payment deadlines, offering discounts to those who pay early, and charging late fees and interest on overdue payments.

Additionally, to keep better track of cash flow, consider analyzing your business’s cash-flow trends by creating a cash-flow statement that details the sources and uses of cash, as well as a cash-flow forecast that estimates the amount of cash moving in and out of the business during a specific period of time. Effective cash-flow management should provide you with clearer data, which can help you avoid potential shortfalls so you can sustain business operations and support growth initiatives.

2. Outdated business models

When a company attempts rapid growth, an outdated business model can hamper its efforts. Business models that worked well on a smaller scale may have trouble handling larger-scale operations. And if a company’s processes are not designed to handle increased customer demand, new business locations, or a major uptick in production, the company may struggle with a sharp spike in costs and delays in delivering products and services to customers.

The strategic solution: A business model should be flexible and regularly updated to respond to new competition, customer needs, and changing economic conditions. It’s important to regularly reexamine your business model and make any necessary adjustments, perhaps by altering your pricing, investing in upgrading technology to speed business processes, or exploring additional ways to reach new customer segments.

For example, a traditional taxi service facing competition from ride-sharing platforms may want to keep pace with evolving market trends and meet customer expectations by adopting a user-friendly app, building in transparent pricing, and expanding service offerings to include food and package deliveries.

By making regular adjustments to your business model, you can ensure that your company’s growth goals remain aligned with changing market demands.

3. Customer service failures

In a survey of 4,600 business respondents, Zendesk’s CX Trends 2022 report found that 73% identified a direct link between their customer service and business performance, and 64% said that wowing customers has a positive impact on their company’s growth.

Yet when a business expands quickly, its customer service departments may struggle to keep pace with an increase in inquiries from customers, as well as demand for products and services. Signs that your business is lagging in customer service includes a rise in customer complaints, declining customer satisfaction scores on surveys, and longer response times. The potential consequences are dire: a drop in customer loyalty, more negative reviews, and a tainted reputation that impacts sales.

The strategic solution: Try to make sure your customer service team has an in-depth understanding of your products and services, so they can respond to customer enquiries promptly with helpful and accurate information.

Try to regularly survey customers and monitor customer feedback on social media to identify common customer pain points that should be addressed. Artificial intelligence-powered chatbots may allow you to quickly respond to customer needs, and as your customer base grows, you may want to consider increasing the size of your customer support teams to handle a higher volume of more complex enquiries. Try to make sure your new hires are well-trained in prioritizing and resolving customer issues quickly and professionally. 

Additionally, your business can use customer relationship management systems to gather data and identify customer trends and areas of concern. This allows you to gain valuable information about customer preferences and enhance the quality of your service offerings.

4. Excessive spending

While growth may mean that you should hire new team members and add physical infrastructure, it’s important not to overspend on large capital investments before your business generates enough revenue to cover these expenses. High levels of debt, compounded by interest payments, can stretch the company too thin financially. What’s more, many businesses may make the mistake of spending too much money on expansion efforts before doing the proper research to ensure the market can support their products and services – after all, can a business succeed if there’s no market for its product?

The strategic solution: Businesses should adopt a strategic and measured approach to avoid spending excessively while growing. This entails aligning spending with realistic growth projections and dialing up spending only when market research supports extra costs. For instance, you may want to introduce a new product as part of your growth strategy, but you should understand market demand before diversifying so that you aren’t overstaffing and producing excess inventory that incurs storage costs.

Instead of purchasing equipment, leasing can be a good way to avoid making extra-large payments up front that drain your savings. Leasing allows you to spread the costs over several months, leaving you with more cash to cover other overhead costs, such as rent on new office spaces. You may also want to consider adopting new technology, such as an electronic point of sale system, to help you actively monitor sales and reduce or increase your stock levels based on customer demand.

While growth may require hiring new team members and adding physical infrastructure, it’s important not to overspend by making large capital investments before your business generates enough revenue to cover these expenses.

5. Employee burnout and turnover

Rapid growth can increase the workload for employees, leading to longer work hours, tighter deadlines, and more stress. When a workforce feels additional pressure to perform, employees may be at risk of burnout, which can lead to high employee turnover, low morale, increased absenteeism, and lost productivity, all of which can thwart a company’s efforts to grow.

The strategic solution: To avoid employee burnout and boost retention, business leaders can:

• Provide adequate resources: Try to make sure employees have the necessary tools and other resources to make their jobs easier. The business may need to invest in new technology, training programs, and hiring additional staff to make sure employees can handle their responsibilities without feeling overloaded.
• Promote from within: As the business expands, employees may be looking for opportunities for skill development and career growth. Advancing current workers, rather than hiring from outside for upper-level positions, can help motivate workers to remain engaged in the company’s mission.
• Encourage time off: Employees should know it’s OK to take breaks, use their vacation time, and disconnect when they’re off the clock, allowing them to recharge. When leaders model this behavior by refraining from emailing employees during off hours and taking days off, employees often follow suit.
• Recognize people’s efforts: Rewarding employees with bonuses, gift cards, and personal days off for hard work can make people feel appreciated. Even saying “thank you” for a project done well and recognizing the person publicly can boost job satisfaction. You may also want to offer other perks, such as flexible work arrangements, to help employees achieve a better work-life balance.

Taking proactive steps to reduce stress among your employees can lead to lower rates of burnout, allowing you to retain happy employees who will support your growth efforts.

The Bottom Line

Growing a company requires meticulous financial planning to ensure success. If a business grows too quickly without adequate resources to manage an expansion, it may end up struggling and risks ultimately shutting down. Therefore, it’s important for business leaders to recognize the signs that a company is in trouble, such as cash-flow shortages and customer service problems. Carefully monitoring growth – while keeping a close eye on employee retention, customer satisfaction, cash flow, and spending levels – can help business leaders implement corrective measures early before problems snowball, making it easier to successfully navigate the challenges of rapid expansion.

A version of this article was originally published August 9, 2022.

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