Overtrading
Encyclopedia
Overtrading is a term in financial statement analysis
. Overtrading often occurs when companies expand its own operations too quickly (aggressively) . Overtraded companies enter a negative cycle, where increase in interest
expenses negatively impact net profit
leads to lesser working capital
leads to increase borrowings leads to more interest
expense and the cycles continues. Overtraded companies eventually face liquidity
problems and/or running out of working capital
.
Financial statement analysis
Financial statement analysis is the process of understanding the risk and profitability of a firm through analysis of reported financial information, particularly annual and quarterly reports....
. Overtrading often occurs when companies expand its own operations too quickly (aggressively) . Overtraded companies enter a negative cycle, where increase in interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
expenses negatively impact net profit
Net profit
Net profit or net revenue is a measure of the profitability of a venture after accounting for all costs. In a survey of nearly 200 senior marketing managers, 91 percent responded that they found the "net profit" metric very useful...
leads to lesser working capital
Working capital
Working capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is...
leads to increase borrowings leads to more interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
expense and the cycles continues. Overtraded companies eventually face liquidity
Accounting liquidity
In accounting, liquidity is a measure of the ability of a debtor to pay his debts as and when they fall due. It is usually expressed as a ratio or a percentage of current liabilities.-Calculating liquidity:...
problems and/or running out of working capital
Working capital
Working capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is...
.
Conditions
- Rapid growth in business development and sales.
- Lesser net profitNet profitNet profit or net revenue is a measure of the profitability of a venture after accounting for all costs. In a survey of nearly 200 senior marketing managers, 91 percent responded that they found the "net profit" metric very useful...
. - The business running a business with limited knowledge.
- Cash flowCash flowCash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...
problem or short of working capitalWorking capitalWorking capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is...
. - Bad cash budgetBudgetA budget is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods...
or unrealistic. - Having large amount of unpaid vendors.
- High amount of financial interestInterestInterest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
expenditure. - High gearing ratio.
- Keen market competition.
- Overstock or slow movement of inventoryInventoryInventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...
.