Question

Explain if it's a good thing for a company to have huge trade receivables balances.

Answer 1

Trade receivable refers to the amount of sundry debtors i.e. the receivable on account of sale of products or services. It cannot be simply said whether it is a good or bad thing to have a huge trade receivable balance.

A huge trade receivable can be due to the fact that the company has sold huge amount of products or services specially near the end of reporting period or it can also mean that the company is unable to collect the proceeds of its sales, so the huge trade receivable should be analysed in context of subsequent receipt of proceeds and the cash flow statement, also an ageing analysis should be done to understand whether any trade receivable balance has become bad debt or not.

So it can be good if the huge amount of trade receivable is on account of substantial increase in sale with the proceeds subsequently being collected and it is not good if the accumulation of trade receivable is on account of non receipt of proceeds of sales with chances of bad debts.