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ACCA Applied Skills · Financial Management · The nature, elements and importance of working capital

Which of the following is the most appropriate action to remedy overtrading in a profitable, fast-growing company?

The best remedy for overtrading is to raise additional long-term finance, such as equity or long-term loans, or to slow growth. The problem is an inadequate capital base for the volume of activity, whereas longer customer credit, more inventory or earlier supplier payment would consume more cash.

  1. ARaise additional long-term finance such as equity or long-term loansCorrect
  2. BExtend credit terms offered to customers to stimulate more sales
  3. CReduce payables days by paying suppliers earlier
  4. DIncrease inventory holding to avoid stock-outs

Explanation

Overtrading is a shortage of long-term funding relative to the scale of activity, so the main remedy is to raise long-term finance (or slow growth). Extending customer credit and holding more inventory would absorb more cash, and paying suppliers earlier would also drain cash, all worsening the problem.

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