Genesis Ltd was incorporated in 2004 and has grown rapidly over the past three years. 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:Required:

(a) Explain the term ‘overtrading’ and state how overtrading might arise for a business.

(b) Discuss the kinds of problem that overtrading can create for a business.

(c) Calculate and discuss five financial ratios that might be used to establish whether or not the business is overtrading.

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

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Balance sheet as at 31 October 2007 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 Current assets Inventories Trade receivables Total assets Equity 000 000 530 (88) 442 168 (52) 116 118 (54) 64 622 128 104 232 854 Ordinary 0.50 shares General reserve Retained earnings 60 50 74 184 Non-current liabilities Borrowings - 10% loan notes (secured) 120 Current liabilities Trade payables 184 Taxation 8