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
Define the terms- Mergers and takeovers The terms takeovers and mergers are inter-related. When a company attains the majority of shares of another company, acquired company is

Q. Explain about Net Working Capital Concept? Net Working Capital Concept: - Net working capital demotes to the difference among current assets and current liabilities. Current

38. The optimum capital structure is the one with i) highest value of the firm ii) Lowest value of the firm iii) highest shares in numbers iv) highest debt

Q. Accounting Change? Accounting Change - Change in (1) an accounting principle (2) an accounting estimate or (3)the reporting entity which necessitates DISCLOSURE and explan

Debentures are also fixed income securities with a specified interest rate. These securities have charge over the assets of the issuer. In contrast to

Management of pension funds Employees Provident Fund Organization (EPFO) is the major organization which deals with the pension system in India. The Employees' Provident Fund O

Determine the name of some profit margin ratios Other profit margin ratios can also be computed: Gross profit/ turnover Profit after tax/ turnover Advertising co

Problem There are two investment plans in the market whose details are given below based on which you need to decide which investment plan you need to select. Propose which inv

Determine the Financial structure of business risk Financial structure shifts toward suppliers of funds recognize a more highly levered position increased financial risk associ

How could we obtain an indisputable discount rate? How should we calculate the beta and the risk premium? There is no indisputable discount rate: a discount rate is a subjectiv