Is the excess of short-term debts on receivables a worrying situation? Why ?

Excess of shorterm debits is mostly sundrey debtors,when see aging of debtors if this debit exceeds a reasonable period in India it is three years if we could not collect it may likely to become bad debts and to be writtenoff in books .it is dangerous in a business.

Well while an excess of debt is always worrisome, it also depends on the nature of business and the level of security of the receivables.

In a unsecured receivables scenario it is very uncertain, but while the receivables from customers is secured in a form of strong contracts or cheques, it is less worrisome. Still the recomended higher limit is 75%

If the nature of business and the product is monopolistic, it is again a little easy going on the short term debt on receivables, but if its a competitive product or service, the company has less bargaining power and hence a lower debt on receivables is recommended, i personally feel it should be around 50% in this case.

Thanks for invitations,

- Excess in "receivables", means that :

1- The organization unable to collect part its debts on due dates and have to revise its credit policy for some clients whom they have delays or there is "low turnover ratio" for the account receivables, i.e. an opportunity to collect excessively old accounts receivable that are unnecessarily tying up working capital,

2-  Excess in account receivable or low receivable turnover, may be caused by a loose or nonexistent credit policy.

3- Inadequate collection function, and / or a large proportion of customers having financial difficulties, therefore focusing is needed to the collection department and its procedures.

4- It is also quite likely that excess in account receivables or a low turnover level indicates an excessive amount of bad debt, which lead the organization to a very high risk

5- The organization suffering from  mismatching between credit and collection policies, which affecting both liquidity and profitability.

YES - when the short-term debt is higher than the receivables (permanent current assets), the firm will be under  greatest risk of being unable to meet the firm's maturing obligations, the assets may not be liquidated in time to pay off the debt at maturity.

This is downright disturbing attitude because it affects the liquidity of the company making it difficult for the company to buy Inventories for the purpose of sale or manufactured