Question

What internal causes in a business can lead to overtrading?

Answer 1

Overtrading happens when a business expands too quickly without having the financial resources to support such a quick expansion. It is an issue of working capital and cash flow.

Internal causes of overtrading :

a) Overtrading occur if growth is achieved by making capital investment in production capacity before revenues are generated.

b) Significant growth in inventory is required in order to trade from expanding capacity.

c) Sales are made on credit and customers take too long to settle amounts owed.

d) Poor management of operations

e) Production problems

f) Poor marketing decisions