Overtrading

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.

Conditions

• Rapid growth in business development and sales.
• Lesser net profit.
• The business running a business with limited knowledge.
• Cash flow problem or short of working capital.
• Bad cash budget or unrealistic.
• Having large amount of unpaid vendors.
• High amount of financial interest expenditure.
• High gearing ratio.
• Keen market competition.
• Overstock or slow movement of inventory.