Overtrading

Overtrading

Overtrading is a term in financial statement analysis. Overtrading often occurs when companies expand its own operations too quickly (aggressively) [1]. Overtraded companies enter a negative cycle, where increase in interest expenses negatively impact net profit leads to lesser working capital leads to increase borrowings leads to more interest expense and the cycles continues. Overtraded companies eventually face liquidity problems and/or running out of working capital.

Conditions

  • Rapid growth in business development and sales.
  • Lesser net profit.
  • The business running a business with limited knowledge.
  • Cash flow problem or short of working capital.
  • Bad cash budget or unrealistic.
  • Having large amount of unpaid vendors.
  • High amount of financial interest expenditure.
  • High gearing ratio.
  • Keen market competition.
  • Overstock or slow movement of inventory.

References

  1. ^ Finance Wales: "A practical guide to cash-flow management", page 28. CIMA, 2004 http://www.highpeak.gov.uk/business/econdev/General/Cash_flow_management_17_08_04.pdf Retrieved on 2010-11-10

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Look at other dictionaries:

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  • overtrading — v. trade beyond one s financial capability or the demand in the market …   English contemporary dictionary

  • overtrading — Trading in which a business has expanded too rapidly thus putting a strain on its financial resources. This can lead to liquidity problems …   Accounting dictionary

  • overtrading — /ˌəυvə treɪdɪŋ/ noun a situation where a company increases sales and production too much and too quickly, so that it runs short of cash …   Dictionary of banking and finance

  • overtrading — overtradˈing noun • • • Main Entry: ↑over …   Useful english dictionary

  • Чрезмерное расширение деятельности — OVERTRADING Развертывание масштабной предпринимательской деятельности при отсутствии достаточного оборотного капитала. Подобная ситуация часто приводит к проблемам с ликвидностью, и компания оказывается неспособной платить поставщикам и… …   Словарь-справочник по экономике

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