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  • Overtrading and Undertrading

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    Yee Tan
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    Overtrading refers to a situation where a rapidly growing firm finds it difficult to generate enough financial resources to meet its objectives, with symptoms including declining profit margins, reduced liquidity, increased collection and payment periods, and reduced inventory turnover. Undertrading is the reverse where assets are underutilized, resulting in idle funds and excessive liquidity from falling sales and slow growth, shown through high current ratios, low stock turnover, and declining sales.

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    Overtrading refers to a situation where a rapidly growing firm finds it difficult to generate enough financial resources to meet its objectives, with symptoms including declining profit margins, reduced liquidity, increased collection and payment periods, and reduced inventory turnover. Undertrading is the reverse where assets are underutilized, resulting in idle funds and excessive liquidity from falling sales and slow growth, shown through high current ratios, low stock turnover, and declining sales.

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    © All Rights Reserved
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    35 views2 pages

    Overtrading and Undertrading

    Uploaded by

    Yee Tan
    Overtrading refers to a situation where a rapidly growing firm finds it difficult to generate enough financial resources to meet its objectives, with symptoms including declining profit margins, reduced liquidity, increased collection and payment periods, and reduced inventory turnover. Undertrading is the reverse where assets are underutilized, resulting in idle funds and excessive liquidity from falling sales and slow growth, shown through high current ratios, low stock turnover, and declining sales.

    Copyright:

    © All Rights Reserved
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    of 2

    Overtrading

    • In the context of bank lending overtrading refers to the 
    situation where the firm is experiencing rapid growth and 
    is finding it difficult to generate the necessary financial 
    resources to meet its objectives.
    • Symptoms:
    • High revenue growth but profit margins declining.
    • Increased overdraft / reduced liquidity.
    • Increased collection and payment periods.
    • Reduced inventory turnover.
    • If it grows too fast it could be a weed!
    Undertrading
    • Undertrading is the reverse of overtrading and results in 
    idle funds, excessive liquidity and the under‐employment 
    of assets.
    • Undertrading is typically sourced in falling sales and slow 
    growth.
    • Symptoms:
    • High current ratios and low stock turnover.
    • Falling sales
    • Remember, slow growth can also generate liquidity problems.
    • Bear in mind that in the lending cases and the real world 
    the symptoms are not always clear‐cut.

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