overtrading

Question 1

what is overtrading

Answer 1

Where a business is growing too fast for the resources that it has increasing the risks where the business may fail

Question 2

when is overtrading most likely to happen

Answer 2

• where a business make significant investment in capacity before revenues are generated
• sales are made on credit and customers take too long to settle amounts owed
• significant growth in inventories is required in order to trade from the expanding capacity
• long term contract required a substantial costs before payments are made by customers under the contract

Question 3

Ratio warning signs of overtrading

Answer 3

• high revenue growth but LOW profit margins
• persistent use of bank overdraft
• significant increases in the payables and receivable days
• low inventory turnover
• low capacity utilisation

Question 4

how can businesses prevent overtrading

Answer 4

• slow down growth
• reduce inventory levels
• lease equipment rather than buy
• obtain longer payment from suppliers
• give customers less time to pay