News that the economy is recovering faster than expected has been welcomed by corporate recovery experts at Crowe Clark Whitehill – but with a note of caution.
James Martin, a partner in CCW Recovery Solutions, warned that growth came with its own risks.
“Recovery and growth are extremely welcome, but come with a health warning because they stretch working capital such that even modest growth can become overtrading.
“The message is ‘Make sure you can afford it, before you spend it’ – which means looking carefully at your borrowing requirements unless you have reserves or savings to invest in your growth.
“It is often difficult to explain the concept of overtrading to those in business – especially start ups and businesses in their early years.
“Surely more business is good? Yes, but only if you can finance it.
“Sadly, many companies go under just as a recession is ending when, with just a little more thought and planning, they could have survived and thrived,” he said.
His words come as the Federation of Small Businesses (FSB) announced that two thirds of their members surveyed expected to grow in the next 12 months.
The survey of almost 3,000 firms found that 11 per cent have taken on more staff in the previous quarter and 15 per cent announced plans to recruit in the coming quarter.
And the FSB recorded its highest ever rating for confidence – 35.7 per cent of respondents, with 25 per cent expecting to see an increase in export activity in the next quarter.
Mr Martin added: “Cashflow is the blood supply of your business – you need to understand the implications of new orders on material costs, stock turn, employment costs and how long your customers take to pay you after you have delivered your side of the bargain.
“Even for those with limited reserves, there are ways and means of financing growth but you need to sit down with your professional adviser and work out what you will need – and when.
“Winging it, or hoping that today’s banking will sort tomorrow’s payments, is not going to work. What a shame if a business fails just as it gets going. And how do you explain that to the enthusiastic entrepreneur?
“Our message to the West Midlands’ growing businesses is ‘Think first’.
“Trying to mend cashflow problems on the run is almost impossible and you may have left it too late. Planning your growth is key and that way the owner can stay in control,” he said.