Overtrading occurs when a firm is engaged in buying too much and selling too little. This means that the organization accumulates more volume of trade than its financial capacity, which results to piling up in debts in the long run. In this case, the working capital becomes inadequate as the current assets of the firm will not be sufficient enough to pay the current liabilities to a ratio of at least 2:1.

SIGNALS OF OVETRADING
1. The signals of overtrading are:
2. Increasing amount of creditors
3.More capital locked up in stock
4. Excessive use of bank overdraft
5. Constant use of trade discounts to customers
6. Cash discounts to debtors to encourage prompt payment
7. Mortgaging the firms properties; in other to obtain loan capital
8. High ratio of debtor to equity capital and to sales
DISADVANTAGES OF OVERTRADING

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