Professional Documents
Culture Documents
Overtrading and Undertrading
Overtrading and Undertrading
• In the context of bank lending overtrading refers to the
situation where the firm is experiencing rapid growth and
is finding it difficult to generate the necessary financial
resources to meet its objectives.
• Symptoms:
• High revenue growth but profit margins declining.
• Increased overdraft / reduced liquidity.
• Increased collection and payment periods.
• Reduced inventory turnover.
• If it grows too fast it could be a weed!
Undertrading
• Undertrading is the reverse of overtrading and results in
idle funds, excessive liquidity and the under‐employment
of assets.
• Undertrading is typically sourced in falling sales and slow
growth.
• Symptoms:
• High current ratios and low stock turnover.
• Falling sales
• Remember, slow growth can also generate liquidity problems.
• Bear in mind that in the lending cases and the real world
the symptoms are not always clear‐cut.