Over trading?

Laurafyp · #1 18-05-2009, 02:26 PM

Hi guys,

Sorry not been around, we have been away for a few days

Somethings been on my mind though- I had a meeting with the accountant last thursday, and he was really impressed with the business figures and how well it has done in the first year, however he did mention that he was a little wary I might be in danger of 'over trading' if Im not careful.

At the time I didnt really question it, but Im not really sure what he meant by this- what does it mean to 'over trade' and why is it a bad thing?

#2 18-05-2009, 02:36 PM

Problems with over trading are usually more related when credit is being offered and cashflow becomes a problem, it can also be caused by exceeding credit limits with suppliers again producing cash flow problems.

As as far as I know, you don't offer credit to your customers, the former should not be an issue.

The only other thing I can think of off the top of my head that he might of meant was possibly if you are going to surpass the VAT threshold if you are not already VAT registered?

Apology accepted

pvcprinting · #3 18-05-2009, 02:39 PM

Laura,

Not overly certain on this myself but suspect it could have something to do with VAT threshold

It was always explained to me that the revenue wouldnt expect to see you making any great profits until the 3rd year

Sure somebody will be along shortly to assist you

In the interim....CONGRATULATIONS on making fill-your-pants such a success

Laurafyp · #4 18-05-2009, 02:42 PM

Well we have established that I do need to be VAT registered, so he is sorting that out for me (although Im still confused on this because I read on the tax site that the threshold applies only on taxable products or services offered- but as 95% of the things I trade in are VAT exempt I thought I wouldnt need to VAT apart from doing so voluntarily, but he seems to think differently on this and that the threshold applies for all and any turnover....)

But anyway, no I dont offer credit and most of my supplies are not purchased on credit so I dont see either of those being an issue either....

Chubster · #5 18-05-2009, 03:01 PM

Here is a little read on it from Business Link

#6 18-05-2009, 04:42 PM

Quote:

Originally Posted by Laurafyp

Well we have established that I do need to be VAT registered, so he is sorting that out for me (although Im still confused on this because I read on the tax site that the threshold applies only on taxable products or services offered- but as 95% of the things I trade in are VAT exempt I thought I wouldnt need to VAT apart from doing so voluntarily, but he seems to think differently on this and that the threshold applies for all and any turnover....)

But anyway, no I dont offer credit and most of my supplies are not purchased on credit so I dont see either of those being an issue either....

You will still need to become VAT registered if you exceed the VAT turnover threshold in any 12 month period (not just the accounting year) whatever the VAT rate of what you are selling.

Laurafyp · #7 18-05-2009, 04:58 PM

Its just this bit on the Revenue and Customs site that makes it sound different....?

Supplying goods or services within the UK. If your turnover of VAT taxable goods and services supplied within the UK for the previous 12 months is more than the current registration threshold of £68,000, or you expect it to go over that figure in the next 30 days alone, you must register for VAT. See the section in this guide on calculating your VAT taxable turnover.

#8 18-05-2009, 05:03 PM

I assume that zero vated VAT has a different legality to VAT exempt, but to the best of my knowledge Laura, you would need to register regardless of most of your sales being zero rated.

fantasycouriers · #9 18-05-2009, 05:25 PM

Zero rated is still vatable, it's just vatable at 0%. - sure about this bit!

Exempt is not vatable, but it still figures in the VAT calculations, as it will restrict the proportion of input VAT you can reclaim. I think.......

Maslins · #10 18-05-2009, 05:36 PM

VAT

To clarify re: VAT...it's your taxable supplies that matter. Exempt supplies are not taxable supplies, zero rated supplies are taxable supplies, they just so happen to be taxed at zero percent.

So you need to clarify whether your sales are zero rated or exempt. I'm not an expert on the tax status of nappies (!) but I know children's clothing is zero rated, so quite possibly nappies are also under the same bracket.

You can have exempt sales of millions of pounds and not register for VAT, it's only your taxable supplies that count (including standard rate, reduced rate, and zero rate).

Typically if your supplies are zero rated, then it's normally best to register for VAT voluntarily, cos you can still reclaim all your input VAT. In your case, assuming your simply reselling the nappies, most of your purchases are probably zero rated too, so it won't have that big an impact, but you will be able to reclaim VAT on standard rated overheads

Overtrading

I wouldn't really have thought this is what your accountant was referring to when he said you run the risk of overtrading though.

An extreme example of overtrading is a small start up business which does really well at selling. They sell loads, and have a full order book. Their customers (say) are invoiced on delivery and expected to pay within 30 days. However, as the business has minimal track record, the supplier demands payment up front. The business then has to borrow money to pay the supplier to fill the orders, then if customers don't pay/are slow to pay the business can't repay their borrowings and go bust despite having huge sales and huge (paper) profits.

In short, it comes back to the old mantra "turnover is vanity, profit is sanity, cash is reality". Ie sales don't mean nothing if you ain't making a profit, and a paper profit don't mean nothing if it doesn't turn into cash.

If (as has been suggested above) your customers typically pay cash up front, I don't really see what the problem is, might be worth getting your accountant to clarify what he thinks may be risky.

Over trading?

General Business Questions and Discussion