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Overcapitalisation and Overtrading – ACCA Financial Management (FM)

VIVA

Reader Interactions

Comments

  1. AhmedRadwan says

    December 13, 2024 at 6:03 pm

    Excuse me, but I feel a bit confused. From the beginning of the video, the explanation seems to be labeled as overtrading, but the example appears to match the concept of overcapitalization instead. Could you please check and clarify if this is correct? I appreciate your guidance.”

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  2. 2kuayyaz says

    December 27, 2023 at 5:08 pm

    Hi John,

    Thanks for the lecture. Quick question for you, I understand we invested all the money from the long term financing so there isn’t any left for Cash, but why isn’t it just the 50 number and why does it become 0?

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    • John Moffat says

      December 28, 2023 at 8:18 am

      But where would the 50 come from given that the SOFP must balance? 馃檪

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      • 2kuayyaz says

        December 28, 2023 at 11:45 am

        Ah yes. I see the issue. Thanks John

  3. JojoBeat says

    May 21, 2022 at 4:49 pm

    Hi Sir, does an aggressive working capital investment policy mean we are overtrading?

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    • John Moffat says

      May 22, 2022 at 7:54 am

      No – it is a choice of policy.

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  4. JojoBeat says

    April 5, 2022 at 7:56 pm

    Hi Sir, overtrading = higher sales = higher receivables = higher current assets = higher working capital. However in the lecture you mentioned we would run into liquidity problems which is associated with low working capital. Can you please clarify this?

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    • John Moffat says

      April 6, 2022 at 7:29 am

      Higher sales will lead to higher receivables and higher inventory. This will need cash to finance it and unless they raise more long-term finance, the cash will have to come from their short-term cash which can end up meaning they go into overdraft and therefore have liquidity problems (i.e. might not be able to pay their bills).
      Look again at my illustration as to how this might happen.

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  5. bigga says

    February 17, 2022 at 1:59 am

    Hello sir.
    Why didnt we double the cash in the beginig when we added the $500 to the $700 and was the non current asset figure doubled or we just added $500?

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    • John Moffat says

      February 17, 2022 at 5:48 am

      We can only double the cash if we raise more long term finance to cover the extra working capital. If we do not raise more long-term finance then the cash balance has to reduce. I do stress this in the lecture!

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      • bigga says

        February 22, 2022 at 1:41 pm

        Thank you sir, this was very help3

      • John Moffat says

        February 22, 2022 at 6:40 pm

        Great 馃檪

  6. Samuel says

    January 18, 2021 at 5:38 pm

    Thank you so much Sir. Your explanantion has made it more clearer for me to understand overcapitalisation and overtrading. It’s helped me to appreciate and be able easily identify the complications that they can cause as well.
    Thank you so much.

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  7. shobinya says

    March 12, 2020 at 9:39 am

    Sir, I have a 2017 june edition of BPP Financial Management books. Is it fine to refer it for my study purpose for June 2020???

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  8. farahhh says

    January 21, 2020 at 8:03 pm

    Thank you for explaining so well, Sir. 馃檪

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  9. asher2019 says

    October 31, 2019 at 12:27 pm

    Thanks John for this presentation on over/under capitalization. I really do appreciate the distinction more so with the illustration.

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  10. Samuel Koroma says

    July 2, 2019 at 11:44 am

    Thanks for the illustrations used. It was very helpful to me. What level of working capital should be business then maintain in order to avoid overtrading or overcapitalization?

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    • Samuel Koroma says

      July 2, 2019 at 11:46 am

      *should the instead of be.

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      • John Moffat says

        July 2, 2019 at 4:45 pm

        There is no ‘best level’ of working capital. It all depends on the type of business.

        To avoid over-capitalisation they should make sure that they are managing each part of working capital efficiently (as explained in the following chapters).

        To avoid overtrading, they should plan properly when expanding to make sure they raise sufficient finance not just to finance the extra machines etc. but also to finance the extra working capital needed.

      • Samuel Koroma says

        July 8, 2019 at 12:15 pm

        Noted with thanks sir

  11. irham says

    November 5, 2018 at 2:05 pm

    Dear Sir,

    How did we arrive of $ 100 bank over draft?

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    • John Moffat says

      November 5, 2018 at 3:17 pm

      It is the missing figure to make the SOFP balance 馃檪

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