Over and Under Trading:
Over Trading:
Over-trading and under-trading are facets of
over and under-capitalization.
Over trading is a curse to the business.
A company which is
under-capitalized
will try to do too much with the limited amount of capital which it has. For
example it may not maintain proper stock of stock. Also it may not extend much
credit to customers and may insist only on cash basis sales. It may also not pay
the creditors on time. One can detect cases of overtrading by computing the
current ratio and the various turnover ratios. The current ratio is likely to be
very low and turn over ratios are likely to be very higher than normally in the
industry concerned.
Under Trading:
Under-trading is the reverse of over-trading. It means keeping funds idle and
not using them properly. This is due to the under employment of assets of the
business, leading to the fall of sales and results in financial crises. This
makes the business unable to meet its commitments and ultimately leads to forced
liquidation. The symptoms in this case would be a very high
current ratio and
very low turnover ratio. Under-trading is an aspect of
over-capitalization and
leads to low profit.
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