Overtrading risks

There is currently a real risk of over confidence and hence over-trading, a common problem when the order book is growing.

While big companies are generally pretty good with payments, it is their suppliers who can create problems as they in turn find themselves understaffed to keep up. Sound risk assessments and a measure of caution will stand smart companies in a better place to consider the impact of State and Federal treasury officials fiscal conservatism in the next financial year.

Now we have a two-speed economy and a divided set of prospects for small business. Those that are on the rising tide from the mining sector are so busy that meeting commitments is a question of access to staff and short-term capital. Those that are trying to sell offshore and build their export markets are still finding it hard to get the funds needed to build an offshore presence.

As China, the US and even Australia cease to pump funds into their economies and make a desperate scramble to get deficits under control, there will be difficulties ahead in accessing capital to expand in the second half of this year. Companies that get most of their profits from sales in US dollars and have most of their operating costs in Australia are going to find that offshore marketing costs are rising and profits are falling.

Many small business owners are preparing business plans on the basis of their recovery from the year before and trend projections for the year ahead. With the rise and rise of the Aussie dollar, there are very real risks that smart companies could convert optimism into the hazards of overtrading in the second half of this year.

Take the case of Flight Centre, that is having a great year as a result of the flight to overseas tourist resorts. According to Andrew Flannery, their CFO, “The Australian business is still the profit house for the group, so it’s probably a net positive for us now.” The travel agent generates around 20% of its earnings in the US and just under 10% from the UK, so international travel offsets the impact of the currency movements. Even big guys like ResMed are looking at margin compression as the US economy grows by slashing its dollar.

It all looks very good on paper but in reality the capital and organisational costs multiply rather than just add to costs of doing business. The reality needs to be considered, as there are substantial risks associated when a business tries to fulfil new orders at a level that can’t be supported by working capital or current assets.

This is a fantastic time to build strong and effective relationships with your upstream suppliers and downstream customers through negotiation, collaboration and management of both capital and cashflows.

For more Futurist blogs, click here.

Dr Colin Benjamin is an entrepreneurship and strategic thinking consultant at Marshall Place Associates, which offers a range of strategic thinking tools that open up a universe of new possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship. Colin is also a member of the global Association of Professional Futurists.