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 financial statements of the business are set out below:

All purchases and sales were on credit.

A dividend was paid during the year on ordinary shares totalling £4,000.

Required:

(a) Calculate and discuss five financial ratios that might be used to establish whether the business is overtrading. Do these five ratios suggest that the business is overtrading?

(b) State the ways in which a business may overcome the problem of overtrading.

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Statement of financial position as at 31 October ASSETS Non-current assets Property, plant and equipment Land and buildings at cost Accumulated depreciation Fixtures and fittings at cost Accumulated depreciation Motor vans at cost Accumulated depreciation £000 £000 530 (88) 168 (52) 118 (54) 442 116 64 622