Overtrading

Overtrading in Companies

FINANCIAL MANAGEMENT

By

Meshack Miyogo:

Daystar University

Nairobi

27-03-2009

Table of Contents

1. INTRODUCTION …………………………………………………….. .1

2. CAUSES OF OVERTRADING ...............................................................…...2-6

2.1 Unplanned expansion

2.2 Increased demand

2.3 Competition

2.4 Gearing

2.5 Inflation.

3. CONCLUSION…………………………………………………….. ………….6

4. REFERENCES…………………………………………………………………7

Overtrading basically is a condition in which the resources in particular the liquid resources of a business are insufficient to maintain the existing level of trading. It mostly happens when companies gear up for expansion of operations so quickly that it they live no room to have enough working capital to pay for their expenses and may face default. This particularly happens during the booms when companies increase revenue without considering means to finance the increased turnover. Subsequently lack of a trading plan and strategy in most instances leads to overtrading (Hoeffler 2001).

Overtrading can easily take place when Small firms often without a great deal of financial strength get large orders and in the process engage in heavy borrowing to fund the orders. Subsequently predictions of future cash flows are made though time scales for payments are underestimated. Large buyers might take more time to pay yet raw materials used for their orders are due for payment and the trader cannot add pressure this eventually might lead to overtrading (Wild, Subramanyam,&Halsey, 2004)

According to Wild et al. (2004), overtrading is a common problem, and it often happens to recent start-ups and rapidly expanding businesses. Existing and successful corporates might also succumb to the downfalls of overtrading by simply growing and expanding quickly without the financial strength to sustain the growth. As a result of this, a company may maybe unable to meet its financial...