Overtrading is the practice of conducting more business than can be supported by a firm’s working capital. When this happens, a company usually runs out of cash, placing it at considerable risk of bankruptcy. As an example of overtrading, a company seeking more sales offers easy credit to its customers on long payment terms. The outcome is that the firm has to pay for the goods it sold to the customers, but will not have any proceeds from the sales for a long time, and so does not have sufficient cash to pay its suppliers. Overtrading can be avoided by regularly updating a cash forecast, as well as by maintaining a line of credit with a lender.

The concept also refers to excessively high levels of trading by a securities broker, usually in order to earn a larger commission. Alternatively, it can refer to excessive trading by an investor, which may run counter to his or her investment strategy.

Related Courses

Working Capital Management