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Ask the Tutor ACCA FM

Overtrading

CCindy7y ago
Hi Sir John, Can I be clarified with this as I am a bit confused? As overtrading means a low working capital, why is it that an increase in sales revenue is a symptom of overtrading as this might mean either increase in cash or receivables, thereby increasing the working capital? Thank you in advance.
CCindy7y ago#1
Additionally, relative to this query for clarification. Does overtrading corresponds to aggressive approach?
John MoffatJohn MoffatTutor7y ago#2
A rapid increase in sales is just a possible symptom of overtrading. If sales increase rapidly then if they have not planned properly then they might be forced into a large overdraft, Higher sales will mean more receivables, but it takes time to get the cash from the receivables. Please watch my lectures where I explain all of this. And no, it does not correspond to an aggressive approach. An aggressive approach is where a company deliberately decides to use more short-term finance. Overtrading is where they have been forced into it by bad planning.
CCindy7y ago#3
Thanks.
John MoffatJohn MoffatTutor7y ago#4
You are welcome :-)
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