Trade receivables is a term used to describe the amount of money owed by one company to another. It is the money owed by one company to another for products and services that have been sold. It typically refers to services that are paid for in credit, whereby the customer hasn't provided the full payment. In other words, trade receivables are what a company is owed for the goods and services it has provided to others.
The companies or persons that owe the outstanding amounts are referred to as trade debtors.
You will also encounter the term "trade receivable days". This term represents the amount of time it takes a company to collect on its outstanding invoices. The longer it takes for a company to get paid, the more trade receivable days it will have.
Trade receivables are categorised as current assets on a company's balance sheet. These assets are ones that the company intends and expects to turn into cash within the next twelve months.
What is the difference between trade receivables and accounts receivable?
There is no difference between these terms and they are used interchangeably. Both trade receivables and accounts receivable represent the money owed to a business for its goods or services - and both are considered assets.
What are non-trade receivables?
Trade receivables are not the sole receivables a business may possess. Non-trade receivables also exist, though they differ slightly.
Non-trade receivables are receivables that a company gains via avenues that do not include the sale of goods or services. This may include interest payments, insurance claims or tax refunds.
You will note that non-trade receivables are also current assets on a company's balance sheet, though they should not be included in any trade receivables calculations.
Furthermore, you should discount non-trade receivables when seeking how to reduce trade receivables. They should only be taken into account when you are viewing your overall outstanding receivables.
Why are trade receivables important?
Trade receivables are important because they allow companies to get paid for their products and services, which in turn allows them to purchase such products and services.
Having increased trade receivable days can be a sign that a company is having trouble collecting its invoices, which could lead to financial difficulties down the road.
Businesses with lots of trade receivables and trade receivables days may also showcase poor debt management. It's an indication that the company isn't managing credit and this can lead to an influx of bad debt. As a consequence, it's easy to fall further into debt and run the risk of bankruptcy or liquidation.
How to calculate trade receivables
It is critical for all businesses to understand and reduce trade receivables. In order to do this, one must understand the trade receivables formula and how to calculate it.
Using the trade receivables formula
Trade Receivables = Debtors Receivables + Bills Receivables
Here is a simple example of trade receivables using this formula:
Your debtor's receivables are $20,000 and your bills receivable are $12,000; the trade receivables will be:
Trade Receivables = 20,000 + 12,0000 = 32.000
Estimating trade receivables days
If you wish to figure out the trade receivable days, you can use the trade receivable days formula below:
Trade Receivable Days = Trade Debtors × 365 / Credit Terms – Payment Terms
For example, if a company had $100,000 in trade debtors and its credit terms were 60 days and payment terms were 30 days, then it would have:
100 - (60×365 + 30) or 90 days
As you can see, trade receivables are important in determining your cash flow and how much money is coming into the company.
If you have an upcoming sale or purchase order that needs to be paid for within a payment of 30 days, this will give you an idea if your business will have enough cash flow until then.
Why should you care about your trade receivables?
The primary value in understanding your trade receivables is that it will help you forecast your cash flow.
The better your understanding of the trade receivable days outstanding, the more accurate your forecasting will be.
You can also use this information to negotiate better payment terms with customers and suppliers alike.
On the contrary, unmanaged trade receivables can also mean a cash flow crunch. Less money comes into your accounts, meaning you have a harder time paying for essential business expenses - like employee wages, bills and so on.
The better you understand trade receivables, the easier it will be to manage any issues that may arise with owed money.
If you are concerned about how much is being collected or paid out by trade debtors for your business then accounting software like Xero or Quickbooks can help keep track of this information and innovative credit control platforms like Chaser will help you manage the process of reducing your trade receivable days.
How can you reduce trade receivables?
The good news is that there are always ways to reduce the trade receivables on your balance sheet, which will improve cash flow.
You can do this by targeting three key problems:
- Collect accounts receivable faster
- Reduce time taken to collect payment from customers after making sales
- Enquire as to why some invoices take longer to be paid than others
Here are some actionable tips that'll help you tackle these main issues to improve cash flow and reduce trade receivables:
Send an invoice as soon as work has been completed
After completing your side of a contract, it is encouraged to immediately send invoices to the client. This gives them a prompt reminder that an invoice is due, which can reduce owed payments and ensure you receive payment as soon as possible.
Use ways to incentivize customers to make faster payments
Businesses can use a range of strategies to encourage customers to pay a lot quicker than normal.
There are two highly effective routes you can take:
- Offer discounts on early payments
- Set penalties for late payments
A minor discount of 5% can be more than enough to incentivize customers to pay on time. Set the payment terms to include a clear payment window - 30 days is common. In conjunction with this, include a 5% discount for any customers that pay within 7 days. They have a chance of saving money while faster payments improve your cash flow.
Setting penalties also prevents drawn-out late payments. In the payment terms, clearly state that any payments not received by a set date will be charged with interest. Customers will want to avoid this, so they should make faster payments.
Send multiple invoice reminders to customers
It's always a good idea to remind customers of their payment obligations, and there are two ways reminders are most effective:
Send a before-due date email reminder prior to payments being made
Sending out a reminder before the due date helps to confirm that the customer has all the necessary information to make payments - and to meet your payment terms.
Remind them of what they owe, when it is due and how they can pay. If payment has not been received a week after you initially sent the invoice, this is a good time to follow up.
If you're looking for a more automated way to remind your customers of their payment obligations, consider using an invoice reminder service. This will help take the burden off of you and ensure that all invoices are paid on time.
Chaser's market-leading automated invoice reminders help you reduce the number of late payments and get paid faster. Chaser's software is easy to use, fast, and scalable for businesses big or small.
In addition to sending automated reminders, Chaser also helps you stay on top of your accounts receivable balances by showing how much customers owe across all invoices in one place. This allows you to see which customers are past due, helping you make informed decisions for your business.
Send payment reminders when the invoice is overdue
Good credit control is all about persistence. You should send payment reminders as soon as the invoice becomes overdue. This will show your customer that you're serious about getting paid and hopefully avoid any late payment penalties.
The only issue with constantly being on top of your unpaid invoices is that it takes time and effort. However, the benefits of good credit control outweigh the negatives and there are tools out there you can use to reduce the workload associated with getting paid on time.
Chaser is one of these tools.
Chaser automates the process of chasing payments, so you can focus on more important things. It emails your customers when an invoice becomes overdue, reminds them to pay and even provides a link to make payment quickly and easily.
All reminders sent by Chaser come from your email address and our reminder templates can be altered to reflect your tone of voice and relationship with specific customers.
With Chaser, you get all the benefits of automation, while still keeping the personal touch.
Make it easy for customers to pay
The easier it is for customers to pay, the more likely they are to do so on time. Chaser makes it easy for customers to pay by providing a link to a Payment Portal in every reminder to make payment quickly and easily.
Chaser's Payment Portal allow your customers to make payments via credit card, debit card, PayPal, Stripe and BACS. So, regardless of where your customers are based, Chaser has a payment solution that will work for them.
Consider invoice discounting to improve cash flow
Invoice discounting is a tactic that enables you to start financing trade receivables.
In essence, you release cash tied up in your unpaid invoices and "sell" them to a third-party vendor. This vendor will then provide a cash advance (which can be up to 90% of the invoice) allowing you to have access to cash money.
Your accounts receivable are used as collateral for this cash advance, and you will use the future payments to repay what you owe. Technically, this approach doesn't reduce accounts receivable, but it can improve your balance sheet by giving you more cash to work with.
Reduce your trade receivable days with Chaser
Chaser is a complete trade receivable management system. Chaser’s features include automated reminders for overdue invoices, the ability to add multiple payment methods and integration with most accounting systems.
Chaser's platform allows you to automate the entire debt collection process, reducing the amount of time it takes to receive payments from your customers. This means you can focus on growing your business rather than chasing payments.
