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In the illustration 1 of over trading of the open tuition course notes, the non current assets have doubled in the next year, the inventory has also doubled, in the same manner as receivables but the cash has remained unchanged. But the tutor has not brought it out . Can you please clarify further so as to improve my understanding of overtrading
The problem with overtrading is that the company runs out of cash.
If a company expands rapidly, then the obviously need to buy more machines etc., but they will also need to finance more inventory and higher receivables.
Because they are expanding rapidly, it takes time for the extra profits to turn into cash and so there is a risk of having liquidity problems if they do not raise enough extra finance.
Hope that helps.
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