Genesis Ltd was incorporated three years ago and has grown rapidly since then. The rapid rate of growth has created problems for the business, which the directors have found difficult to deal with. Recently, a firm of management consultants has been asked to help the directors to overcome these problems.
In a preliminary report to the board of directors, the management consultants state: ‘Most of the difficulties faced by the business are symptoms of an underlying problem of overtrading.’
The most recent of the business are set out below.
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A was paid during the year on ordinary shares of £4,000.
(a) Calculate and discuss five that might be used to establish whether the business is overtrading. Do these five ratios suggest that the business is overtrading?
(b) S tate the ways in which a business may overcome the problem of overtrading.