Overtrading is defined as financing too high a sales volume with too little working capital. Which statement best describes overtrading?

Overtrading is defined as financing too high a sales volume with too little working capital. Which statement best describes overtrading?

• A. The business maintains high cash balances while sales grow.
• B. The business borrows to finance fixed assets aggressively.
• C. The business tries to finance a high sales volume with insufficient working capital.
• D. The business delays paying suppliers to improve liquidity.

Answer: (C)

Overtrading happens when a business grows its sales rapidly but doesn’t have enough working capital to support that growth. The juice to run day-to-day operations, like inventories and receivables, rises with sales, but if the financing for this growth relies on existing funds or short-term debt, the company can run into cash shortages. That mismatch between fast sales growth and insufficient current assets to cover it is exactly what the best statement describes: the business tries to finance a high sales volume with insufficient working capital. The other scenarios don’t capture this core issue. Maintaining lots of cash as sales rise indicates strong liquidity, not overtrading; borrowing to fund fixed assets is about long-term investments rather than the short-term working capital gap, and delaying payments to suppliers is a cash-management tactic, not the fundamental funding problem inherent in overtrading.

Overtrading happens when a business grows its sales rapidly but doesn’t have enough working capital to support that growth. The juice to run day-to-day operations, like inventories and receivables, rises with sales, but if the financing for this growth relies on existing funds or short-term debt, the company can run into cash shortages. That mismatch between fast sales growth and insufficient current assets to cover it is exactly what the best statement describes: the business tries to finance a high sales volume with insufficient working capital.

The other scenarios don’t capture this core issue. Maintaining lots of cash as sales rise indicates strong liquidity, not overtrading; borrowing to fund fixed assets is about long-term investments rather than the short-term working capital gap, and delaying payments to suppliers is a cash-management tactic, not the fundamental funding problem inherent in overtrading.