There is a particular kind of failure that only happens to companies that are doing well.
It does not look like failure while it is happening. It looks like success with a cash flow problem attached. The order book is the fullest it has ever been. The team is busy. The owner is winning accounts he has chased for years. And somewhere in the middle of the best twelve months the company has had, it quietly becomes unable to pay for the work it has already won.
The name for this is overtrading, and it means growing faster than your working capital can carry. Working capital is just the money a business needs to bridge the gap between paying out and getting paid.
This is the third essay in a series on the funding gap in freight forwarding. The first explained why a forwarder is really an unpaid bank, and the second explained why the timing never lines up. This one is about why growth makes both of them worse rather than better. All figures are invented and rounded.
The arithmetic that catches everybody
Go back to the ratio from the first essay. On a typical container import, a forwarder fronts somewhere around thirty naira for every one naira of margin the job earns. The exact multiple varies with the duty rate and the value of the goods, but the shape holds everywhere.
Now grow.
Ten more containers a month means ten times the margin. It also means ten times the cash out, and the cash goes out weeks before the margin comes in.
So the business has two numbers growing at once. The profit grows with the margin. The cash requirement grows with the volume. And because the volume number is roughly thirty times larger to begin with, it wins every single time, in every month, without exception.
This is why the trap is invisible. Every job is profitable. The margin percentage has not moved. Nothing has got worse. The company is simply doing more of exactly the same thing, and doing more of it is what breaks it.
A company that does one bad job has a bad month. A company that does a hundred good jobs it cannot fund has a bad ending.
Why it kills the good ones
The cruelty of overtrading is that it selects for competence.
A badly run forwarder does not grow fast enough to meet this problem. It loses tenders, it annoys clients, it stays small, and it survives for years in a mediocre way because it never has more money out than it can afford.
A well run forwarder wins work. It delivers. Clients recommend it to other clients. Its volume climbs steeply, which means its cash requirement climbs steeply, and it walks straight into the wall at speed.
I have come to think this is one of the most under-discussed facts in our industry. The skills that win you the business are not the skills that let you survive winning it, and nobody separates the two until it is too late to learn the second set.
The four stages, in the order they arrive
The slide has a very consistent shape. None of the four steps looks like a crisis while it is happening. Each one looks like a difficult month.
Stage one: you start paying your suppliers a little late.
Not dramatically. A week here, ten days there. Your overseas partner, your haulier, your agent. You are not in trouble, you are just managing.
But something changes that nobody measures. You stop being the customer people fight for. Your partner quotes you a little wider because you are now a slower payer. Your haulier takes the other job when two come at once. Your rates get worse, and they get worse quietly, and nobody in the company connects it to the payment behaviour because the two facts sit in different departments.
Stage two: you start turning away work you should be taking.
You cannot fund it. Meanwhile you are still carrying the badly funded work you accepted six weeks ago, because that money is already out there. So you are refusing good jobs while financing bad ones, which is the exact opposite of what any sensible person would choose, and you are doing it because the bad jobs came first.
Stage three: the borrowing starts.
Usually an overdraft, because it is the facility a forwarder already has. It is the most expensive money available and the wrong shape for the need: a short facility funding a long receivable. It works for a while. It always works for a while. That is the problem with it.
Stage four: one client pays very late, or does not pay at all.
And because the margin on each job is thin and the money fronted is thick, that single client takes with it the entire profit of twenty or thirty clean jobs. Not the margin on their own work. The margin on everybody's work.
If a large share of everything you are owed sits with one client, you do not have a customer. You have a single point of failure with a logo on it.
What to watch, before stage three
The useful question is not "are we profitable". You will be profitable the whole way down. The useful questions are these, and none of them are answered by a profit and loss account.
Is the money we have out growing faster than the margin we are earning? If volume is up forty percent and cash out is up forty percent but margin is up forty percent too, that is growth. If cash out is up sixty and margin is up forty, that is overtrading, and you have perhaps two quarters to act.
Are we paying our suppliers later than we did six months ago? This is the earliest warning signal there is and almost nobody tracks it, because being paid late is a metric and paying late is an embarrassment. Track it anyway. It moves before anything else does.
What is the most we have ever had out on one client at one time? Not what they owe today. The peak. Two or three overlapping files is the normal answer and almost nobody has ever added them up.
Could we survive our largest client paying ninety days late? Not defaulting. Just paying late. If the answer is no, then that client is not an asset, they are an exposure, and you should size them accordingly.
Growth is not the enemy. Unfunded growth is
I want to be careful here, because the wrong conclusion is easy to reach and genuinely harmful.
The answer is not to stay small. Small is not safe, it is just slow, and a small forwarder with one client is more fragile than a growing one with fifteen.
The answer is that growth has a price in cash, that price is knowable in advance, and you should know it before you accept the work rather than after.
Every new client comes with a number: the maximum amount of your money that will be sitting with them at any one time. That number is calculable from their payment terms, their volume and the duty profile of their goods. Work it out during the tender, not during the crisis.
Then treat it exactly as you treat any other capacity limit. You would not accept forty containers if you could only clear thirty. Accepting more funded work than you can fund is the same decision, and it is the one nobody thinks of as a capacity question.
A tender you win that you cannot fund is not a win. It is a slow, expensive way to lose.
The next essay is the honest one: what a small forwarder can actually do about all this when the client is enormous, the market is a price war, and walking away is not an option anyone will let you take.