Show the signs of overtrading, Financial Management

Q. Show the Signs of Overtrading?

There are a number of usually recognised signs that a company may be overtrading. These are considered mutually with relevant financial data from Appendix 1 in the following paragraphs.

Rapid increase in turnover

The forecast financial statements for 2003 demonstrate that our turnover is expected to increase by 25% during the year.

Rapid increase in current assets

Current assets are expected to increase by 27% slightly more than the increase in turnover.

Increase in inventory days and receivables days

Receivables days are expected to raise from 110 to 121 days with a 38% increase in total receivables but inventory days aren't expected to increase but to fall from 265 days to 238 days. However a 19% increase in inventory is anticipated.

Increased trust on short term finance

Reserves are expected to rise by $100000 whereas total assets are expected to increase by $1400000. The extension of our business activity is so based primarily on an expansion of short-term finance (trade payables and overdraft). Payables days will raise from 177 to 190 days while in relative terms payables will increase by 42% - more than the expected rise in turnover (25%) and in our overdraft (20%).

Diminish in current ratio and quick ratio

The current ratio is expected to drop very slightly from 1·04 to 1·03, but the quick ratio isn't expected to fall but to increase from 0·44 to 0·47.

Nevertheless any interpretation of these ratios should reflect the fact that different industries have different working capital needs. Sector average data is able to be useful here.

Posted Date: 7/12/2013 1:51:27 AM | Location : United States

Related Discussions:- Show the signs of overtrading, Assignment Help, Ask Question on Show the signs of overtrading, Get Answer, Expert's Help, Show the signs of overtrading Discussions

Write discussion on Show the signs of overtrading
Your posts are moderated
Related Questions
The straight value of a convertible bond is nothing but the value of a non-convertible bond having same characteristics. For example, assume that a company has tw

What is the role of securities firms in investment intermediaries? Securities firms assist within the trading of existing securities into the secondary markets. The two major c

Walk-through tests - Auditor • "Walk-through tests" -That is tracing one or more transactions by accounting system and observing application of internal controls. Rev

Role of Trustee in Pension Fund: Trustees are people in control of long-term asset allocation of a pension scheme. Whatever benchmark they set will, as we shall see, influence

Explain how to resolve a "ranking conflict" between the net present value and the internal rate of return.  Why should the conflict be resolved as you explained? Whenever there

Explain how Eurocurrency is created. Answer: The center of the international money market is the Eurocurrency market. A Eurocurrency is a time deposit of money in an internationa

Tests of controlor systems based auditing Tests to obtain audit evidence about effective operation of the accounting and internal control systems. It isn't concerned about deta

Stock A has settled into a constant dividend growth pattern of 6 percent per year. The current dividend is $1.50, its current price is $15.90. You are an analyst and believe that

Issuing Procedure of treasury bills As discussed above, the RBI on behalf of central government, announces the auctioning of T-bills by tender notification through the press. T

Alternative summarised version of tests of controls · Segregation of duty (staff records are separate from wages department) · Documentation ( written evidence ) ·