CAF-7 · Chapter 12 · Question 2 of 15
A rapidly expanding retail business is facing severe cash shortages. It is frequently delaying payments to its suppliers, relying heavily on its bank overdraft, and its current ratio has fallen to 0.8. This company is displaying classic symptoms of:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Overtrading (Under-capitalization)
Explanation
Overtrading occurs when a business tries to support too large a volume of trade with too little long-term capital. Symptoms include a heavy reliance on overdrafts, deteriorating liquidity ratios, and an inability to pay suppliers on time.
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