Overtrading in Business

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Questions and Answers

What type of businesses are particularly prone to overtrading?

Young and rapidly growing businesses

What is one likely symptom of overtrading?

The need to keep borrowing money

List one situation that makes overtrading likely.

Generous credit terms for customers

What is a company doing when it is overtrading?

<p>Attempting to fund a large volume of production with inadequate cash</p> Signup and view all the answers

Besides young companies, what other type of company may face overtrading?

<p>Established companies</p> Signup and view all the answers

Flashcards

Overtrading

Attempting to fund a large volume of production with inadequate cash, often seen in rapidly growing businesses or those expanding too quickly.

Generous credit terms

Offering extended payment deadlines to customers, potentially straining cash flow and increasing the risk of overtrading.

Undercapitalization

The condition of a business having insufficient capital to support its level of operations, making it vulnerable to overtrading.

Slim profit margins

When the difference between revenue and cost of goods sold is very small, leaving little room for error and increasing the risk of overtrading.

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Constant Borrowing

Frequent borrowing to cover daily expenses, an indicator that a business might be struggling with overtrading.

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Study Notes

Overtrading is common in young, rapidly growing businesses.
It happens when a business tries to support high production levels without enough cash.
Established companies expanding too fast can also experience overtrading.
Generous customer credit terms, undercapitalization, or slim profit margins increase the risk of overtrading.
A key sign of overtrading is frequent borrowing to cover daily expenses.

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Description

Overtrading occurs when a business grows too quickly without sufficient capital. This often leads to cash flow problems as the company struggles to finance its increasing production or sales. Generous credit terms and undercapitalization can exacerbate the risk of overtrading.