‘Don’t overstretch’ warning to businesses

Businesses are being warned not to be tempted to overstretch themselves as the UK economic recovery continues to gather pace.

Damian Walmsley, partner at accountancy and business advisory firm Moore and Smalley, believes businesses could be at risk if they try to service an influx of orders while still under-resourced.

He believes many fail to mitigate against risks such as overtrading, increased staff recruitment costs, a rise in interest rates, inflation pressures, or exposure to exchange rate fluctuations.

He said: “It’s great news that the economy is growing again and that unemployment is falling, but it’s long been said there’s more risk of a business failing in an upturn than in a recession. That’s because many businesses suddenly have lots of big orders coming through but lack the working capital to fulfil them.

“They may need to take on additional staff, invest in new plant and machinery, and increase spending on raw materials. Business can simply run out of cash, so investment in growth and capital expenditure has to be sustainably planned.”

The UK economy grew by 0.8% in the second quarter of 2014, maintaining its rate of growth in the first quarter of the year, according to the latest estimates from the Office for National Statistics (ONS). It marks the sixth consecutive quarter of GDP growth and puts the economy past its pre-slump peak.

According to the Insolvency Service, the number of company liquidations in England and Wales decreased between April and June 2014 when compared to the same period last year. Administrations, company voluntary arrangements and receiverships were also lower than a year ago.

Damian believes businesses have plenty of reasons to be optimistic, but that any investment decisions need to be based on a business’ own management information and projections.

He added: “Funding for growth is major consideration for many businesses at the moment and we are seeing a lot of enquiries from businesses looking at how they can fund that growth.

“Our corporate finance team are also seeing plenty of instructions, both from businesses looking to get back on the acquisition trail and from business owners exploring options for business sales. “Business expansion also brings with it numerous tax planning considerations, such as how to maximise tax allowances on capital expenditure projects. The timing of such investments is crucial to ensure tax relief is maximised and cashflow remains strong. We are advising a number of our clients on the optimum window for these investment projects.”