Over trading arises when company expands its sales revenue fairly rapidly without securing additional long term capital adequate fro its needs.
The signs/symptoms of over trading are:
- Payable increasing rapidly
- Cash and liquid assets declining at fairly alarming rate
- Receivable increasing, possibly more than proportionately to sales revenues.
- Inventory increasing , possibly more than proportionately to sales revenue
The symptoms imply that the company has expanded without giving proper thought to necessity to expand its capital base. It has consequently continued to rely on its suppliers and probably its bank overdraft to provide additional finance required.