From the numbers to the change
- Your numbers sayRevenue up year on year, bank balance and headroom down
- The cause underneathOvertrading: every new rupee of sales needs more stock and credit than it releases
- What changesSlow the credit and stock that growth is consuming, price the growth properly
- What to expectCash that rises with sales instead of against them
An illustration of how the thinking runs, not a client result.
The numbers to open first
Compare this year with last on a monthly basis, not an annual one. Overtrading is clearest in the months when sales jumped.
| Number | How to get it | What worries us |
|---|---|---|
| Cash conversion cycle (days) | Debtor days + stock days - creditor days | A cycle that has lengthened by 10 days or more while sales grew |
| Working capital as % of sales | (Debtors + stock - creditors) / sales | Rising each quarter |
| Gross margin on incremental sales | Margin of customers added this year vs the rest | New sales at lower margin than the old |
| Bank limit use | Average drawn / sanctioned | Trending to the ceiling as sales rise |
Likely causes, and how the numbers test each
| Possible cause | What you would see in the numbers |
|---|---|
| Debtors growing faster than sales | Debtor days rising; one or two new large accounts on 60-90 day terms |
| Stock bought for growth that has not arrived | Stock days rising; slow-moving lines growing |
| Discounted growth | Sales up, gross margin down in the same months |
| Capex funded from working capital | Fixed assets up, term loans flat, cash credit up |
What to change, in order of effect
Measure what each new rupee of sales consumes.
Work out the working capital needed per ₹100 of sales. That is the price of growth.
Fix terms on the biggest new accounts.
Advance, shorter credit or a limit per customer.
Right-size stock to the actual order book,
not the hoped-for one.
Re-price growth that earns below its cost of funding.
A sale that needs 90 days of credit at a thin margin may lose money once interest is counted.
Align the funding.
Match working-capital limits to the real cycle before the shortfall, not after it.
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What to expect, and when
Cash from the first changes, especially collections and stock, can show within 30 to 60 days. Pricing and customer terms take a quarter to show in margin. The aim is for cash to rise with sales, not against them.
Mistakes that make it worse
- Chasing more sales to solve a cash problem. It deepens the gap.
- Using the cash credit limit as the funding for growth with no plan to reduce it.
- Treating all customers' sales as equally valuable.
- Looking only at the annual numbers, where the pattern blurs.
Go deeper
Cash runway calculator. Profit but no cash: the owner question
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What owners say after the numbers started talking
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Quoted word for word from our clients. Read more client words →
Questions owners ask us
What is overtrading?
Growing sales faster than the business can fund. Working capital in debtors and stock absorbs the cash that profit should produce.
Why am I short of cash when sales are higher?
Because sales on credit become debtors, not cash, and growth needs more stock. Profit must first be large enough to cover both.
Is growth bad?
No. Unfunded, unpriced growth is. Plan the cash cost of growth before you chase it.
How do I know if I am overtrading?
Look for a lengthening cash conversion cycle, falling headroom on your bank limit and margin on new sales that is lower than on old.