Trade Receivable Days & Trade Payables Ratios

Blue_Dabadee

Is an increase in Trade Trade Receivable Days ratio, good or bad?

Is an increase in Trade Payables Days ratio, good or bad?

My assumption is that an increase in Trade Receivables Days ratio is bad and an increase in Trade Payables Days is bad as well.

SBWife

It would depend on why receivables and payables are increasing. Both can be increasing for good reason as well as bad.

Receivables may be increasing because credit policies have been changed to make the company more competitive in the marketplace.

Payables may be increasing because the company has re-evaluated its working capital financing and decided that taking longer to pay its suppliers is a cheap source of financing which it hasn't been using to its full extent.

littlemiss123

mxph3 wrote: »

Is an increase in Trade Trade Receivable Days ratio, good or bad?

Is an increase in Trade Payables Days ratio, good or bad?

My assumption is that an increase in Trade Receivables Days ratio is bad and an increase in Trade Payables Days is bad as well.

Theoretically, an increase in Trade Receivables Days is bad because it means it is taking you longer to get cash from your debtors into the firm.

And, an increase in Trade Payables Days is good because it means you have longer to pay your creditors (also, trade payables is typically a cheap source of financing).

Although, as SBWife pointed out, there could be underlying reasons which could mean that the above does not apply. Such as, you may have a potential new client that would be very valuable to the firm, so you have agreed to increase the Trade Receivable days in order to secure the client's business. In this case, it is taking you longer to receive the money but you have secured a lucrative contract.

Also, your payable days might have increased, not because you are taking advantage of the cheap credit, but because you cannot pay the amounts owed.