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Overtrading

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Overtrading

  1. 1. Working Capital Management Working capital is the cash needed to pay for the dayto day operation of the business Working capital calculated like belowCurrentAssetsCurrentLiabilitiesWorkingCapital Stocks Debtors Cash Investments Trade Creditors Dividends Taxation Short term Loans
  2. 2. Working Capital Cycle
  3. 3. When Working Capital mismanaged? Cash FlowProblems Main Causes of Cash flow problemsLow profits or LossesOver- Investment in CapacityToo Much StockAllowing Customers too much CreditOver TradingUnexpected ChangesSeasonal Demand
  4. 4. 
  5. 5.  Mr. Silva has set up a business 2 years ago. His annual turnover is Rs.200,000and annual profit is Rs.18,000. He operates with a bank OD of up to Rs.25,000.His working capital is sufficient to steadily expand the business. Then he get a contract to supply Business A.(with d excitement of increasinsales) The order is for Rs.40,000 a month for two years. He will be paid 75 daysafter delivery.The first monthBusiness runs smoothly. Suppliers start delivering as promised. The onlyproblem is that he is short of space.The second monthThings still look good. He has made the first delivery to Business A. Heincreases her overdraft.The third monthSilva has problems. He has made more deliveries to Business A but Hisoverdraft is at the limit. He is getting calls from unpaid suppliers.
  6. 6. The fourth monthSilva in hot seat. Can’t pay all His suppliers. Some stopped delivering andsome are threatening legal action. He thinks that he will be fine because he isstill supplying Business A.The fifth monthHis overdraft is Rs.40,000 over the limit. 3 suppliers start legal action. Thebank refuses to pay cheques. Then first payment from Business A arrives ontime.The sixth monthThe next Business A payment does not arrive on the due day. He cannot fulfillany more orders. The bank demands that the overdraft be repaid within sevendays.
  7. 7.  Debtors Increasing credit sales volume Extended credit sales period Increasing and excessive reliance on trade payables Increase in short term borrowings Cash Increasing sales without corresponding increase inprofit Lack of cash in hand or at bankSymptoms of Over Trading ……
  8. 8.  Creditors Stocks are ordered earlier and need to be paid for beforethey are sold Extended trade payable periods Inventory Increasing inventory days More stock required to meet sales demandIncreasing the length of working capital cycle!!
  9. 9.  Internal causes Poor management of operations Production problems Poor marketing decisions External causes Economic Financial failure:
  10. 10. Investigation of overtrading…. Stock (inventory) days Debtor (trade receivable) days Creditor (trade payable) days Current ratio Quick ratio Gross profit margin Net profit margin Return on capital employed
  11. 11. Examples for Over Trading …..o Seylan Bank PLCo Next Clothing Retailero Sock Shop
  12. 12. o Borrowing or increasing in capital to increase current assets - casho Sale of non-trading assetso Tightening terms of credit granted to customerso Negotiating longer credit terms from major supplierso Setting new payment termso Offering discounts for prompt paymentso Automated paymentso Invoice discounting or Factoringo Negotiating terms with supplierso Improve inventory controlo Lease/hire purchase assetso Introduction of new capitalo Reduce distribution of profito Cost cutting
  13. 13. Anyone can think thatovertrading sounds like a goodthing, but actually it isn’t – thekey to a healthy business is to geta good balance between undertrading and overtradingBorrowing MoneyShrinking profitsLate paymentsOver ExpansionDepletion of Working CapitalAccountantImpact on financial Health and Business…..
  14. 14. Discipline Cycle !!!DisciplineConsistencyPatienceProfits &Success
  15. 15.  Overtrading means trying to grow quickly without having the financialstrength . Overtrading can be a very big problem for companies, especially SME. This is common in start- ups and expanding businesses Over-trading can be a problem for many firms when the economy movesout of a recession. If company is growing, It’s vital that you have excellent financialmanagement information in place to keep the business on track andprevent problems arising.

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