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ACCA Applied Skills · Financial Management · Determining working capital needs and funding strategies

Which of the following is the most typical symptom of overtrading in a business?

Overtrading is typified by fast sales growth financed by short-term credit and an overdraft, leaving liquidity weak. The business has too little long-term capital for its activity level, whereas idle cash and slow turnover point to overcapitalisation instead.

  1. ARapid sales growth financed mainly by short-term credit and an overdraft, with falling liquidityCorrect
  2. BLarge cash balances and slow inventory turnover alongside falling sales
  3. CDeclining sales funded entirely by long-term equity
  4. DA high current ratio caused by excessive receivables collection periods only

Explanation

Overtrading arises when a business expands sales rapidly without enough long-term finance, so it relies on overdrafts and trade credit and liquidity weakens. Large idle cash and falling sales describe overcapitalisation, which is the opposite problem.

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