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Transacting more business than the firm's working capital can normally sustain, thus placing serious strain on cash flow and risking collapse or insolvency.
When a business has insufficient finance to sustain its level of trading. A business is said to be overtrading when it tries to engage in more business than the investment in working capital will allow. This can happen even in profitable circumstances.
1. Excessive buying and selling of stocks by a broker on an investor's behalf in order to increase the commission the broker collects.
This situation has been known to arise when brokers are pressured to place a newly issued security underwritten by a firm's investment banking arm.
Also known as "churning".
2. A situation in which a company is growing its sales faster than it can finance them. This usually leads to enormous accounts payable or accounts receivable and a lack of working capital to finance operations.
1. One way to protect yourself from overtrading (churning) is through a wrap account - a type of account that is managed for a flat rate rather than charging commission on every transaction.
2. Many businesses become insolvent because they try to accommodate everyone who wishes to purchase their products. This ultimately leads to not being able to pay for the financing costs used to produce the goods.
