Overextension

Overextension occurs when a company or individual takes on more financial obligations than they can manage, leading to an unsustainable level of debt or financial strain. For businesses, overextension often results from expanding too quickly or taking on excessive debt without the necessary cash flow to support operations. Overextended companies may face liquidity problems, bankruptcy, or forced downsizing to regain financial stability.

Example

A retail chain opens too many new stores in a short period, taking on significant debt that it cannot repay due to slower-than-expected sales, leading to overextension and financial distress.