Overtrading

• What is overtrading?

  When a business expands too quickly without having the financial resources to support such a quick expansion
• What are some ratio warning signs of overtrading?

  • High revenue growth but low profit margins
  • Persistent use of a bank overdraft
  • Significant increase in current ratio
  • Low capacity utilisation
  • Very low inventory turnover ratio
• What can a business do to prevent overtrading?

  • Reduce inventory levels
  • Slow the pace of growth until profit margins and cash balances improve
  • Lease rather than buy
  • Give customers less time to pay