Cash is key when you’re running a Thai business
I’d bet most of you who run a business in Thailand would like to increase sales right now, wouldn’t you? Selling more can only ever deliver wonderful results, right? Wrong! Especially when you’re running a small Thai business.
There’s this age old problem known as overtrading that creeps up on you just when sales are growing rapidly. Overtrading means selling more than you can handle as a business. Overtrading occurs when a business has insufficient working capital to sustain its level of trading. This can happen even in profitable businesses in Thailand, not just smaller operators. Overtrading often occurs when companies expand their own operations too aggressively. Over traded companies eventually face liquidity problems and run out of working capital, which is not a good sign for your business in Thailand.
Typically, overtrading sneaks up on you when your invoices are being paid late or when sales grow too quickly. You think you’re doing amazingly well, then you suddenly find you don’t have cash in the bank to pay your suppliers, or enough working capital to pay wages and bills and rent, even though you’ve sold more than enough to cover your costs.
Rising optimism that the long-awaited recovery could be around the corner may result in some Thai businesses overreaching themselves – and ending up with serious cashflow problems. Running out of cash causes too many promising start-ups to fail. The most tragic thing is that cashflow difficulties are often avoidable. You just need to know how to get it right.
- You have a starting balance of $2,000 in your bank account
- You sell products at $50, which cost $25 from a supplier ($25 profit per item)
- In week one you sell 20 items generating $1,000 sales and $500 potential profit
- Your supplier delivers in one week but requires cash on delivery
- You pay your supplier $500 for the first order and deliver to your client who wants payment terms of 14 days so you raise an invoice and wait to be paid
- In week two you sell 40 items with sales of $2,000 and potential profit of $1,000
- Your supplier delivers the second order and you pay them $1,000 and release the goods to your client (raising invoices for a further $2,000)
- In week three you sell 70 items, with $3,500 turnover and potential profit of $1,750
- You celebrate a record sales week – Things are going great right?
Now here’s your problem! Your supplier wants payment of $1,750 before they deliver the next order however you only have $500 left in your bank account. You don’t have enough cash to pay your supplier even if your client pays the week one sales invoice of $1,000 on time.
You’ve actually sold $6,500 of product with potential profit of $3,250 but due to overtrading have run out of working capital.
Remember CASH IS KING!
You should also think about adopting some changes to your Thai business practices. One way you can help prevent overtrading is by keeping a tight control of the money you have going out of your business. Effective debt management and credit control can help you avoid overtrading, by ensuring that you get paid more efficiently and have the cash to pay suppliers and staff. You can consider:
- Producing regular cashflow forecasts
- Seasonal fluctuations in sales and ensure budgets reflect this.
- Injecting new capital
- Reducing the amount of stock you hold
- Reducing the period that you hold stock
- Renegotiating better terms with your suppliers
- Reducing the money you personally draw out of the Thai business entity
- Leasing your assets or buying them on hire purchase (HP)
- Negotiating staged payments or deposits for services/products you offer.
- Raising your invoice straight away and be clear with customers about your payment terms
- Having a system to chase payments (gentle reminders through to firm warnings)
- Offering discounts to customers who pay invoices early (keep in mind your profit margins)
- Regularly check existing customers credit ratings and payment history
- Cutting costs and be more efficient
Crucially, you need to watch out for the key overtrading warning signs which may include payment terms slipping, increased use of your overdraft facility, regularly paying your suppliers late and the drop in quality of your goods or services.
Invoice discounting is an effective solution to overtrading. It involves borrowing cash against your invoices, while staying in control of debt recovery. Factoring is a similar funding option, but involves the fund provider recovering your customer’s debts. If you think your business is in danger of overtrading, speak to your bank manager as soon as possible.
Head of Franchising
Lloyds Banking Group
Tel: 07802 324018
Richard heads up the Lloyds Bank franchise team and is a regular contributor to trade publications and national press. He regularly speaks at franchise seminars and exhibitions.