ACCA Applied Skills · Financial Management · The nature, elements and importance of working capital
Which of the following is a typical consequence of overtrading?
Overtrading typically leads to a rapid sales increase financed by stretched payables and an expanding overdraft, causing liquidity problems. The business grows faster than its long-term capital base can support, so it runs short of cash even while profitable.
- AExcess cash balances and falling sales
- BA rapid increase in sales financed by stretched payables and overdraft, causing liquidity problemsCorrect
- CLow inventory levels caused by weak demand
- DA reduction in receivables days due to tighter credit control
Explanation
Overtrading occurs when a business expands sales faster than its capital base supports, so working capital is financed by overdraft and delayed payments to suppliers. This leads to liquidity strain despite profitable growth. Option A describes overcapitalisation, not overtrading.
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