Overstrading

OVERTRADING & UNDERTRADING

The concepts of over-trading and under-trading are

intimately connected with the net working capital position

of the business. To be more precise, they are connected

with the cash position of the business.

OVER-TRADING: Over-trading means an attempt to

maintain or expand scale of operations of the business

without sufficient cash resources. The firms involved in

over-trading have a high turnover ratio & a low current

ratio. In such situation, it is not in a position to maintain

proper stocks of materials, finished goods, etc., & has to

depend entirely on the suppliers to supply them at the

right time.

Causes of Over-trading :-

•Depletion Of working capital – Results in depletion of

cash resources. Cash resources may get depleted by premature repayment of long –term loans, excessive drawings,

dividend payments, purchase of fixed assets & excessive net

trading losses etc.

•Faulty Financial Policy :- Such policy can result in

shortage of cash & over-trading in several ways like—

Using working capital for purchase of fixed assets.

Attempting to expand the volume of business without

raising necessary resources.

•Over-Expansion :- In national emergencies like war,

natural calamities etc. a firm may require to produce goods

on a larger scale. The government may pressurise the

manufacturers to increase the volume of production

without providing for adequate finances.

•Inflation & Rising Prices:- inflationary trend in the economy

puts pressure on the prices of the resources. The

manufacturer needs more cash resources even to

maintain the existing level of activity.

• Excessive Taxation:- Heavy taxes result in depletion of

cash resources at a scale higher than what is justified. The

cash position is further strained on account of efforts to the

company to maintain reasonable dividend rates for their

shareholders.

CONSEQUENCES OF OVER-TRADING

•Difficulty in Paying Wages...