Overtrading
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Overtrading is a term in financial analysis. The term "Overtrading" originate from 2 words which were "Over" and "Trade" respectively. Overtrading often occurs when companies expand its own operations too quickly (aggressively) [1]. Overtraded companies enters 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 eventally face liquidity problem and/or running out of working capital.
[edit] 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.
- Current liabilities are overdue, having large amount of unpaid suppliers.
- High amount of financial interest expenditure.
- High gearing ratio.
- Going concern issue at least within 12 months.
- Management integrity issue.
- Lack of good bank facilities or support.
- Lack of board of directors, management commitment or support.
- Lack of sources of finance.
- Keen market competition.
- Overstock or slow movement of inventory.
- Lack of quality of personnel or accountant.
- Change of key personnel or business partners.
[edit] References
- ^ Finance Wales: "A practical guide to cash-flow management", page 28. CIMA, 2004 http://www.cimaglobal.com/cps/rde/xbcr/SID-0AAAC544-D8865174/live/Cash_flow_management_17_08_04.pdf Retrieved on 2007-03-28
