OVERTRADING Flashcards
What is overtrading
Overtrading occurs when an organisation lacks the finances to fund their expansion
What are some ways that overtrading can occur
There has been investment in new capacity(fixed assets) that is not yet generating revenues
Spending on new capacity was more expensive than budgeted, or has taken longer than anticipated to complete
Trade credit is required in order to utilise increased capacity
The business accepts a contract that requires significant investment before revenues are generated
Customers do not pay as quickly as anticipated
How can you deal with the problem of overtrading
How to deal with the problem of overtrading - First way to do it is to get more money in: Sell buffer stock, sell unused assets, chase up debtors, reduce trade credit, take bank loans. You could also reduce the money that’s leaving the business: Reduce expenditure, negotiate trade credit, lease fixed assets
