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 — 1. Excessive buying and selling of stocks by a broker on an investor s behalf in order to increase the commission the broker collects. This situation has been known to arise when brokers are pressured to place a newly issued security underwritten …   Investment dictionary

  • overtrading — Trading by an organization beyond the resources provided by its existing capital. Overtrading tends to lead to liquidity problems as too much stock is bought on credit and too much credit is extended to customers, so that ultimately there is not… …   Big dictionary of business and management

  • overtrading — The undertaking of business activity that results in *cash flow problems and potential *insolvency Overtrading is characterized by *working capital problems arising from the simultaneous (i) slow receipt of cash receipts relating to *accounts… …   Auditor's dictionary

  • 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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