Overtrading

Overtrading is over expansion (of sales) relative to available resources. It is also, in US usage, a synonym of churning.

Overtrading leads to cash flow problems, most often because of a lack of working capital. A typical scenario is that cash inflows from sales (especially sales on credit!) come in too late to pay suppliers for the increase in stocks required. Another common scenario (in construction for example), wages may have to be paid, and equipment and material obtained, long before a customer pays for work completed.

Businesses can avoid overtrading through good planning (so that they can ensure that resources are available when required, before problem occur) and by being well financed (so, for example, funds are available for to increase working capital if required).

Solving an overtrading problem after it occurs is more difficult. It may be necessary to actually turn down business. Raising money may be possible through invoice finance or by finding new investors.

Increasing debt may be difficult if already highly geared. Even if the money can be raised, the terms demanded to quickly fund a large increase in gearing may make the increased sales unprofitable.

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