Overtrading is an unknown effect for many managers and yet it is very formidable. A slow but powerful poison. In some cases, as in several other assessments for those trying to mitigate it, this risk is evaluated as a major change approaches, and it is forgotten to monitor it in order to detect it before it produces harmful effects for the company.
So what is overtrading? Why does it have a particular aspect in the context of a developing country like the Democratic Republic of the Congo? What would be the right attitude to avoid falling into this trap? We will try to answer each of these questions.
- Overtrading
You have probably heard of a saying that goes, "The fastest way to reach your destination is to go slowly". This saying makes perfect sense in the phenomenon of overtrading. Overtrading is a situation in which a company experiences significant expansions, substantial growth in terms of revenue without having the adequate resources to support this growth or a mismatch that occurs between the level of activities and resources when they decrease. In a way, it is a counter-natural effect.
The resources that may be lacking for the company to meet the level of activity include financial resources, production capacities, the skills of key personnel, human resources... Overtrading can arise from a market effect such as a growth in demand related to seasonality, a sudden increase in demand due to a structural change... or internally, such as the loss of competent personnel not adequately replaced, a decrease in storage capacity or production capacity, the disappearance of a source of funding.
The most common signs that indicate distress and call for a diagnosis are:
- A rapid growth in sales levels;
- A decrease in margin;
- Recurring cash flow problems;
- An increase in the company's debt ratio and related financial costs;
- Recurring stock and debt payment problems;
The context of developing countries
The economic structure, the market, and the context in which a company operates have a real impact on its competitiveness and the need to better structure itself. A fair, competitive, and organised environment forces companies to acquire certain skills and advantages before hoping to achieve growth in return; thus, they are less exposed to the phenomenon of overtrading.
Let us not forget that we have defined overtrading as a mismatch between the level of activity and the resources of the company. While in some cases this arises from the aforementioned facts, in the context of developing countries, it is necessary to add, in particular:
- Poorly planned and poorly executed local investment incentive policies.
In the concern to see their economies evolve and the standard of living of the populations improve, developing countries are implementing policies that encourage local entrepreneurship, hoping for a better redistribution of wealth.
While these policies are strongly desired for their contributions to development, it must be noted that when they are isolated from important prerequisites, they produce the opposite effect to that intended.
Indeed, we have experienced the Zairianisation in the Democratic Republic of Congo as an example; this measure, which involved nationalising commercial and land properties in 1973 to then redistribute them to nationals. The lack of preparation, shortly after independence, sowed the seeds of its failure. Another attempt is that of the Regulatory Authority for Subcontracting in the Private Sector (ARSP), which struggles to produce the expected results.
These policies, when not well planned, give undeserved economic advantages to unprepared and untrained individuals. This mismatch between the skills and abilities of the beneficiaries and their artificially increased level of activity is a phenomenon of overtrading, the risks of which should be assessed and mitigated.
- The culture of nepotism, corruption, and clientelism.
A company from a developing country can see its activities grow rapidly in an artificial manner in situations of unfair competition. When a company's increase in activity is the result of tax evasion, non-competitive advantages, and political positioning; it is very likely that this growth has been achieved without expertise, without the organisational, logistical, and material structure capable of supporting this level of activity.
Thus, we will be in a situation where the company and shareholders are very happy to see their turnover grow with a shaky cash flow system based on emergencies, the quality of services and products that do not keep up and are in perpetual decline, weak managerial policies in terms of managing the operating cycle, credit control, etc., until the day the machine stops due to unbearable debt, significant losses on receivables, and suffocating bank financial charges. This is yet another case of overtrading.
- The social and economic structure
It is important to be aware early on of the social and economic structure of the environment in developing countries. The infrastructure deficit can pose a constraint that does not allow for a certain level of activity; the administrative burden of public services, the available skills, the available expertise... must at all times be assessed against growth opportunities.
A savvy entrepreneur will have a clear policy regarding the training of their employees to address the gap created by a university education that is often disconnected from practice, compensatory investments in response to the deficit in public investment, and will know when to stop and prepare to move forward more effectively. It is all a matter of timing; otherwise, they will likely find themselves in a case of overtrading.
The right attitude to have
We will indeed start by discouraging all anti-values, as any benefit derived from them is certainly short-lived.
We will suggest that entrepreneurs seek support in their growth from consulting specialists to:
- Define objectives in line with their vision;
- Define a coherent strategy in terms of activities and resources to achieve the set objectives after analysing the external and internal environment of the company;
- Establish a good risk assessment system, integrating, as circumstances dictate, that of overtrading;
- Implement a good information system, ideally an ERP like SAP, that allows for a dashboard and monitoring of activities;
- Adopt good management practices through continuous improvement in line with risks and the level of activity.
