Invoicing, Being Invoiced and Bank Balanace

[MarkCrowther]

Hi All,

I wonder if you can help with a few questions on invoicing by way of some imaginary scenarios.

1) If my colleague and I, who is employed by my business, invoice a company for say £1000 and my business doesn't have the £500 that is his 'half' sat in the bank, to pay for services he's now provided - isn't that overtrading?

2) If he is self employed and invoices me for £500 and the business hasn't £500 to pay them - again, isn't that overtrading?

The reason I'm a little unsure is I've been careful never to have outstanding invoices owing that I don't have money in the bank to cover if I 'shut shop' tomorrow. Paying invoices owed being a fine balance between using banked cash and money from invoices payed by clients, so I remain (reasonably) square each month.

When I told a supplier they might want to 'invoice my client directly' as I was doing the above, to paraphrase - they seemed a little surprised.

Have I gone bananas and can accept invoices for goods and services that I don't have the money for? I know I do in my personal finances, but...

Thanks,

Mark Crowther

[Let it Ride]

Hi Mark

In short its seems to me (without further info) that you're not overtrading or indeed anywhere near it.

Overtrading (at least in the context that you mean) essentially involves a company taking on more work than it can financially handle. If a company is trading at a particular level and then is approached with a contract that is far beyond it's normal level of business it can result with all available cash reserves being exhausted without the revenue from that contract being available for some considerable period of time.

An example would be a company that refurbishes pubs - they normally operate on one or two jobs at any one time, they know they can afford the labour costs, the cost of fixture and fittings etc and know how long it takes to finish a job and get paid. They do a job for a company who own a chain of pubs who are impressed with their level of craftsmanship and offer them a contract for 10 more however there is a time constraint. Suddenly the company concerned (if they accept the contract) has to find a larger work force, they have various logistical problems to overcome, they have to buy more equipment,tools, fixture, fittings etc up front and then half way through the contract they do not have enough cash to pay their new workforce etc. They can't raise any more cash from the bank and within a short period of time they are in big trouble. An overtrading disaster and more common than you might think.

If you are invoicing for work already done (or services/equipment already supplied) and do not have the cash in the bank to cover them at any point that is merely a cash flow difficulty and not overtrading. It seems to me you keep a tight rein on your company's finances and that can only be a good thing.

It is essential for any enterprise to have a business plan that they adhere to and constantly review. It is so easy to have the 'big break' that turns out to be a millstone and should the large contract come along make sure you have the financial wherewithal to service it.

Kind regards

Ian

[MarkCrowther]

Excellent, thanks Ian. The example you gave was similar to one in my mind and hence my thinking. Slowly it all begins to make sense

And yes I do keep tight control over the finances, probably a little too cautious for my own good at times.

Mark.