Submitted by: Submitted by piyush
Views: 441
Words: 589
Pages: 3
Category: Business and Industry
Date Submitted: 11/17/2010 01:44 AM
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...