Q. Conclusion on Overtrading?
The majority of the evidence suggests that our company is moving into an overtrading situation, although the evidence is not conclusive. Current pressure as of our bank to reduce our overdraft serves to highlight the fact that our company needs to reduce its trust on short-term finance whether trade finance or overdraft finance. Enhanced working capital management could reduce the level of investment in receivables and to a lesser extent perhaps in inventory which would ease our financial difficulties. But more drastic measures than this will be needed to deal with our reliance on short-term finance.
Though the size of the reduction in the overdraft required by the bank isn't known at present simply reducing trade credit to an average level would require $1m of additional finance. Factoring of receivables has been recommended as a source of working capital finance and it is certainly true that this would produce an immediate injection of cash that could decrease our overdraft and lower our average trade credit period. A additional consideration is that our company has no long-term debt and given our continuing growth this source of finance also deserves serious consideration.