Vinu: Hey Manu, I’ve been going through our company's financial statements, and I noticed that our creditors have been continuously increasing year over year. Should we be concerned about this? Is it a good or bad sign?

Manu: That’s a great observation, Vinu. The continuous increase in creditors can have both good and bad implications depending on the context of the situation. Let’s break it down.

Vinu: Alright, so what could be the positive side of having increasing creditors?

Manu: Well, an increase in creditors might indicate that we are negotiating better credit terms with our suppliers. If we’re able to delay payments without affecting our relationships with them, it frees up cash flow for other business activities. This can be particularly useful for expanding operations, investing in new projects, or managing short-term liquidity.

Vinu: So, it’s like we’re getting more time to pay our bills, which keeps more cash in the business, right?

Manu: Exactly. That’s a positive aspect, especially if we’re using that extra cash to generate more revenue or invest in growth. It can also mean that our suppliers trust us enough to extend more credit, which is a good sign of our credibility and business relationships.

Vinu: But I guess there’s a flip side to this as well?

Manu: Yes, you’re right. If creditors are increasing because we’re struggling to pay our bills on time, that’s a red flag. It could indicate cash flow problems or even signal that we’re over-leveraged. Over time, if we keep delaying payments, we might damage our relationships with suppliers, who could then shorten credit terms, demand advance payments, or even stop supplying us altogether.

Vinu: I see. So, if we’re delaying payments because we can’t afford to pay, it could hurt our business in the long run?

Manu: Exactly. Additionally, continuously rising creditors could also mean that we’re relying too much on short-term credit to finance operations, which might not be sustainable. If we don’t manage this carefully, it could lead to liquidity issues or increase our financial risk.

Vinu: That sounds risky. How can we determine if the increase in creditors is a good thing or a warning sign?

Manu: We need to analyze the reasons behind the increase. Look at our cash flow statements and compare them with our sales growth. If our sales and profits are growing, and we’re strategically managing credit to reinvest in the business, it’s likely a good sign. But if our sales are stagnant or declining, and we’re delaying payments due to cash shortages, it’s a warning signal that we need to address.

Vinu: So, it’s all about context, right? We need to understand why creditors are increasing and what it means for our overall financial health.

Manu: Absolutely, Vinu. Regularly reviewing our financials and keeping an eye on our cash flow will help us understand the true implications. If the increase in creditors is part of a well-managed strategy, it can be beneficial. But if it’s due to financial strain, we need to take corrective action quickly.

Vinu: Thanks, Manu! That really clarifies things. I’ll dive deeper into our cash flow and sales trends to get a better understanding of where we stand.

Manu: Sounds like a good plan, Vinu. Let’s make sure we stay ahead of any potential issues and keep our business on a strong footing.