ACCA Financial Management (F9) Certification Practice Exam

What is a common indicator of rapid growth that may point towards overtrading?

1. Increase in long-term assets

2. Increase in inventory turnover

3. Increase in sales revenue

4. Decrease in accounts payable

The correct answer is: Increase in sales revenue

The common indicator of rapid growth that may suggest overtrading is an increase in sales revenue. When a business experiences a significant surge in sales, it can be a sign of rapid expansion and increasing market demand. However, this expansion may also lead to overtrading if the company is unable to manage the growth effectively with its existing resources. Overtrading occurs when a business tries to achieve higher sales without adequate financing, leading to cash flow problems as the operational needs grow. In such scenarios, a business may sell more than it can sustain, resulting in a cycle of needing to finance working capital that exceeds what it can realistically support. This can ultimately strain the company’s liquidity and operational stability. Therefore, while increasing sales revenue is often seen as a positive indicator of growth, unchecked growth in this area may raise red flags regarding the company's ability to handle that expansion effectively. The other choices do not indicate overtrading in the same direct manner. For instance, an increase in long-term assets typically reflects strategic investment rather than immediate sales performance. An increase in inventory turnover suggests efficient inventory management and is generally a positive sign. Meanwhile, a decrease in accounts payable may indicate that a company is paying its suppliers more quickly, which is usually seen as a