Factors
young and rapidly growing businesses are particularly prone to OVERTRADING. overtrading occurs when a business is attempting to fund a large volume of production with inadequate working capital.
Investing too much in fixed assets
in the intial stages of a business where funds are limited.
Stockpiling
holding stock of raw material and finished goods is expensive.
Allowing too much credit
a great deal of business is done on credit
Taking too much credit
a great deal of business is done on credit.
Overborrowing
businesses may borrow to finance growth.
underestimating inflation
bussinesses often fail to take inflation into account.
Unforeseen expenditure
business are subject to unpredictable external forces.
Unexpected changes in demand
Although most businesses try to sustain demand for thir products, there may be times when it falls unexpectably
Seasonal factors
sometimes trade fluctuates for seasonal reasons.
Poor financial management
inexperience in managing cash or a poor understanding of the working capital cycle may lead to liquidity problems for a business.
How can a business use credit control to improve their working capital position?
Most businesses have some sort of credit control system, so owing can be collected quickly and easily. A 'tight' or 'easy' credit policy may be adopted. Tight credit terms may be used to improve liquidity, reduce the risk of bad debts, exploit a sellers market, or maintain slender profit margins. Easy credits terms may be designed to clear old stocks, enter a new market, or perhaps help a regular customer with financial difficulties.
2 comments:
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