Accounts Receivable and Payable Interrelationships: Evidence from Indian Small Cap Companies

Abstract

Trade credit is vital for the survival of financial constrained SMEs, especially during the crisis. Companies act as both the proposers and recipients of trade credit. Credit proposed by companies for goods and services is represented by accounts receivable whereas credit is received by accounts payable. The present study focuses on determining the key component between accounts receivable and accounts payable. Further, it is estimating the causal relationship between trade credits offered and availed for the period 2011 to 2020 in Indian BSE small-cap manufacturing companies. The analysis is relevant in determining a company’s trade policy and working capital decisions. The analysis is carried out by panel unit root and co-integration test, followed by panel vector error-correction model and pairwise Granger causality test. Test results of the paper showed that in the short term, there is a one-way interaction from accounts receivable to accounts payable. This indicates that accounts receivable are deriving accounts payable, in terms of amount in the short run. In the long run, (a) in terms of amount, there is a one-way equilibrium connection between accounts receivable and payable & indicates that accounts payable is the dominant component and accounts receivable is the compromising component and (b) in terms of duration, there is two-way equilibrium relationship between accounts receivable days and accounts payable days so the researcher is unable to determine dominant component. The pairwise Granger causality result also confirmed the result of the VECM test.