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Hi sir, the more I get into working capital management the more it confuses me. When we talk about overtrading, why do we say the working capital is low? Inventory and receivables increase to a very high level so how exactly is the working capital low? Wouldn’t it be better to say that there is a higher need of financing due to the increase in working capital?
As I explain in my lectures on the management of working capital, overtrading is where the company has experienced rapid growth and therefore has higher receivables etc., had not planned for the higher finance needed for the higher receivables etc. and is therefore forced into increased short-term/overdraft finance and liquidity problems.
I do illustrate this with an example in my free lectures.
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