There are various ways available at a firm’s disposal in the process of reducing or curbing the problem of overtrading. The ways that are available include the following;
- Issue of new equity – the issue of new equity can be another way of loosening the liquidity of the firm, despite the fact that it comes with a dilution of control of ownership. The proceeds from the issue can be used to find long-term capital expenditure or reducing the debt component of the firm.
- Taking long-term debt – long-term debt is not paid on demand, thus offering an advantage compared to the use of overdraft.
- Debt factoring – improves the cash position of the organization through selling debtors’ lists to a factoring company.
- Increasing the payables payment period – delaying payments to trade creditors, which however needs to be managed because excessive delays will lead to restrictions on further credit in the future.
- Improving the debt collection period – rigorous debt collection methods need to be adopted, to ensure that the company’s debtors pay in time and avoiding bad debts. Discounts may be used for early payments, encouraging clients to settle their accounts in time.
- Checking the liquidity ratio – the company should continuously check its liquidity position through the use of current and quick ratios, these ratios will act as signals for an imminent decline in the liquidity position and call for remedial action.