What do you meant by overtrading, Financial Econometrics

Assignment Help:

Q. What do you meant by Overtrading?

When a company is trading large volumes of sales very quickly, it may also be generating large amounts of credit sales and consequently large volume of trade receivables. It would also be purchasing large amounts of inventories on credit to maintain production at the same rate as sales and so have large volumes of trade payables. This will extend working capital cycle which will have an adverse effect on cash flow. If company doesn't have enough working capital, it will find it difficult to continue as there would be insufficient funds to meet all costs as they fall due.

Overtrading takes place when a company has inadequate finance for working capital to support its level of trading. Company is growing rapidly and is trying to take on more business that its financial resources permit hence it is "under-capitalised". Overtrading usually occurs in businesses which have just started to trade and where they may have suddenly begun to experience rapid sales growth. In this circumstances it is quite easy to place high importance on sales growth while neglecting to manage the working capital.


Related Discussions:- What do you meant by overtrading

How does this activity lead to a market failure, Question 1: a) Faced ...

Question 1: a) Faced with fierce international competition Mauritius should protect its domestic industries, to survive in such an environment. Discuss. b) "The best way

Loan carries an annual percentage rate of 4.85 percent, You borrowed $547,0...

You borrowed $547,000 for the purchase of your new home.  This loan carries an annual percentage rate of 4.85 percent. It will be paid off through equal monthly payments including

Calculate ads working capital cycle, Q. Calculate ADs working capital cycle...

Q. Calculate ADs working capital cycle? AD, a manufacturing entity, has the following balances at 30 April 2005: Extract from financial statements:      $000 Trade receiv

Microeconomics, appraise the Baumol''s sales revenue maximization theory as...

appraise the Baumol''s sales revenue maximization theory as an alternative objective of the firm o

investors could expect to earn 8 percent, A new capital investment that wi...

A new capital investment that will cost $2.5 million and will generate perpetual net cash flows of $400,000 a year. Investors could expect to earn 8 percent elsewhere while taking

standard deviation of a portfolio and probability, Question What is th...

Question What is the standard deviation of a portfolio which is comprised of $4,500 invested in stock S and $3,000 in stock T?

Conservative policy for financing working capital, Q. Conservative policy f...

Q. Conservative policy for financing working capital? A conservative policy for financing working capital is one where short-term finance is usedto fund: A : All of the flu

The desire amount, To buy a retirement home, you will need $525,000 in 18 y...

To buy a retirement home, you will need $525,000 in 18 years. If funds can be invested at an effective return of 6 percent a year, how much must you invest today to have the desire

Discuss the major risks in project, Determine whether the proposed investme...

Determine whether the proposed investment in Gujistan satisfies the investment criteria set by PASE plc. Also discuss the limitations of the criteria in the context of this project

International monetary fund, The international monetary fund and the world ...

The international monetary fund and the world bank are the main lending financial institutions that give assistance to developing nations in the restoration of their economy. Wh

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd