About Over-trading and Under-trading

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It might seem logical that the more business you have, and the larger the orders you can secure, the better position your business is in. But this is not always the case. It is possible to try to grow too big, too fast, and run the risk of overtrading. Difference between overtrading and under trading options occurs when a company expands operations faster than it can afford to. The business enters a negative financial cycle because it does not have enough working capital to pay for the extra machinery, equipment, goods, or staff it will need to ramp up production, while having to wait several months before the money from the new contracts or sales come in.

This leads to liquidity problems for the business, which unless carefully managed, can result in the need to close the business. The easiest way to avoid difference between overtrading and under trading options is to approach any opportunities to grow your business with due diligence and caution.

It difference between overtrading and under trading options important to make sure your business will remain financially sustainable in the short and long term.

Check the affordability and put measures in place to ensure your business does not run out of money, leaving you unable to pay debts when they fall due. Consider the following options to improve liquidity and cash flow in your business, or as part of your contingency plan should things not turn out as well as you expected. Comerica provides this link for your convenience and is not responsible for the content, privacy or security of information on non-Comerica tools.

For more content like this, please visit smallbusiness. The difference between overtrading and under trading options of overtrading. How does overtrading happen? Business start-ups in their first few years of trading are most susceptible, but overtrading can happen to any business that scales up its operations.

A typical example would be a small manufacturing or service company that gets a bigger order or tender. To meet the order, they need bigger premises, more staff, and possibly more equipment. They might also need to place larger orders with suppliers. All this costs money, and often the company will need to pay a significant amount before receiving income difference between overtrading and under trading options the new order or tender.

If the company has not worked out a detailed cash flow forecast and made plans to meet these needs, it might need to borrow money in a hurry. How to avoid overtrading The easiest way to avoid overtrading is to approach any opportunities to grow your business with due diligence and caution. Prepare a detailed cash flow forecast. Implement a tighter stock control policy. Rather than ordering stock or raw materials well in advance and having your working capital tied up in stock, aim to order stock and raw materials just before you need them, to free up capital for your expansion plans.

Chase payment as soon as debts fall due and plan to offer discounts and incentives for early payment, to ease the pressure on your cash flow and avoid the problems of overtrading. Remember not to focus on one big customer to the exclusion of others. They could experience financial problems, or decide to take their business elsewhere. Or they could simply pay you late, leaving your business exposed to an unexpected cash flow crisis.

Some solutions to overtrading Consider the following options to improve liquidity and cash flow in your business, or as part of your contingency plan should things not turn out as well as you expected. Lease any equipment you need, rather than buying for cash or on terms. Use invoice discounting or factoring to boost your working capital quickly and ease your administrative burden. Look for ways to increase efficiencies in your operations.

Be on the lookout for ways to work faster or more productively. You should also be able to negotiate longer payment terms or better prices with your suppliers as you increase the amount you buy from them. Next Steps Stop and look carefully at all the costs and financial implications involved with taking on a large new customer or order before you rush into the deal.

Prepare an accurate cash flow forecast to gauge the likely effect on your short- and long-term liquidity. Keep accurate financial records so you can update your cash flow forecasts and actively manage your business to avoid an unexpected liquidity crunch.

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How do I overcome this? Not being able to pull the trigger is on the opposite side of the spectrum of the overtrading phenomenon. Overtrading is often a product of negative emotions gone awry, either a Martingale money management system designed to be able to sustain several losses in a row before wiping out completely.

Some believe that Martingales that can survive eight straight losses are infallible in some sense because even at odds, the probability of losing eight straight is low. But with enough time it will happen. But undertrading is not a predominantly greed-driven phenomenon like its opposite, but rather one determined by fear. Sometimes, often, or even always, when a trade sets up in a way that fulfills your entry criteria, you are still held back by a fear of putting yourself out there.

But trading is all about putting yourself out there to some extent. Or employing a very risky money management strategy e. And, of course, executing this consistently day by day, which comes with good practice and experience.

Like any other trade, subject, profession, or activity. When you were growing up, how did you become better at mathematics? Without a doubt, by doing math problems.

And yes, with real money at least a little bit , and being able to control their emotions and general mentality. You acquire positive trading habits over time and any pitfalls are controlled and eventually weeded out through taking the appropriate measures. The best advice I can give right off the bat is to invest small. Of course, this means different things to different people. Eventually I realized I was better off at Markets World. Occasionally, fear of pulling the trigger can also be derived from unsureness in whether the probabilities favor you or the house the broker.

I wrote an article on this topic recently:. Determining what Trades are Worth Taking. But a big part of it is sticking with a trading strategy long enough such that it becomes a part of your identity as a trader. Just as I always like to emphasize, a trading strategies that revolves around price action and support and resistance should have its trades planned out ahead of time. You know your level and what needs to happen for you to get in.

If it does, you pull the trigger. Sounds very simple to say, but trading takes a lot of practice and the proper mindset. And overcoming an overtrading or undertrading issue requires this same level of attention.

October 4, Q: I wrote an article on this topic recently: