Overtrading

• What is the concept called when a business grows too fast?

  Over-trading
• How can over-trading be analogized?

  Like an engine overheating
• What is the main risk associated with over-trading?

  Increased risk of business failure
• When is over-trading more likely to occur?

  When significant investments are needed before revenue
• What is one situation that can lead to over-trading?

  Investing in new product development before sales
• How can long credit periods from customers contribute to over-trading?

  They delay cash inflow for the business
• What is another situation that can lead to over-trading?

  Investing in large inventories to support growth
• What can happen when a business undertakes a long-term contract?

  It may incur costs without timely payments
• How can financial ratios indicate over-trading?

  By showing worsening trends in multiple ratios
• What does a low profit margin suggest in the context of over-trading?

  Excess costs are being incurred
• What does persistent use of a bank overdraft indicate?

  Short-term financing for long-term needs
• What does a declining current ratio suggest?

  Issues with payables or cash collection
• What does worsening inventory turnover indicate?

  Low efficiency in managing inventory
• What does low capacity utilization suggest?

  Underuse of production resources
• What is one way a business can manage over-trading?

  Slow the pace of growth
• How can a business improve cash flow during over-trading?

  Control inventory levels effectively
• What is an alternative to buying equipment for capacity?

  Leasing equipment instead of buying
• How can a business manage customer payment terms to combat over-trading?

  Restrict payment time allowed for customers
• What can a business negotiate with suppliers to improve cash flow?

  Longer payment terms with suppliers
• What are the signs of over-trading in financial ratios?

  • Low profit margin
  • Persistent bank overdraft usage
  • Declining current ratio
  • Worsening inventory turnover
  • Low capacity utilization
• What strategies can a business implement to manage over-trading?

  • Slow growth pace
  • Control inventory levels
  • Lease equipment instead of buying
  • Restrict customer payment terms
  • Negotiate longer supplier payment terms