What Does Increase in Trade Receivables Mean?

An increase in the trade receivables amount may mean a company has sold
extra product during a certain period, or that they are not getting payments for
invoices in fast enough. The ladder is of concern to a company’s management
because if the business has a higher ratio of receivables to cash, then that
may demonstrate that the company is not effective in collecting on what it’s
owed. Or it may mean that the company is dealing with too many risky
businesses. If the receivable amount is too low, then perhaps the payments
terms are too strict and not enough product is getting sold.

Sometimes, companies are not able to pay the money they owe for a very
long time, or ever. The company may have gone out of business, maybe their
industry is seeing a downturn in demand, or it simply does not have the cash
flow. There is an allowance for this on the vendor’s balance sheet with a line
amount called “Allowance For Doubtful Accounts”. This allowance is the
expected loss. Companies can calculate the amount a number of ways, but
the amount is deducted from the accounts receivable total in the assets
section of the balance sheet.