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Dear lecturer ,
Could you please briefly tell me the differences between over trading and over capitalization with a few examples because I still get confused and can not differentiate them when I read the book ?You really should watch our free lectures on this – I cannot simply type them all out here 🙂
Over trading is when the company has expanded rapidly and not increased their working capital sufficiently (which results in possible liquidity problems).
Over capitalisation is when the working capital of the company is too high – which means they have more long-term borrowing than they need and therefore paying more interest.
For a full explanation you need to watch our lectures.
Our free lectures are a complete course for Paper F9 and cover everything needed to be able to pass the exam well.Hi John,
I’ve watched your videos (many thanks – they are excellent) but I have a question on this topic from the BPP questions – it’s question 44 in the Practice & Revision kit.
It says that “Overtrading often arises from a rapid increase in sales revenue.” (This is given as a correct answer in the solutions.)
I would argue that a rapid increase in sales revenue would boost Cash and hence would not cause Overtrading. I appreciate that the sales could be on credit and hence it could cause liquidity problems in the short term, but is this an example of an either/or type question (i.e. the type of question I hate!)
Thanks.
Conor.
Have you watched my lecture on this, because I explain exactly why rapid growth in sales very often gives rise to overtrading.
It is likely to give rise to higher receivables and higher inventory. Less ability to control receivables and liquify problems due to not raising more working capital.
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