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All About Trade Receivables

Updated on :  

08 min read.

It pays to keep a careful check on your trade receivables if you want to boost your company’s liquidity. If you sell your products/services on credit, accurately recording every transaction is paramount to your business’s financial health and profitability.

What are Trade Receivables?

Trade receivables are the total sums that a firm has invoiced to a client for providing products and services, but the client has not paid for them yet. These figures are represented in the bills a business delivers to its customers. Aside from inventory, trade receivables are likely to be one of your company’s significant assets. Trade receivables are also called accounts receivable; thus, the terminology may be interchangeable.

Trade Receivables Formula

Trade receivables may be worked out using a simple formula:

Debtors + Bills Receivables = Trade Receivables

So, all you have to do is look at your company’s balance sheet and add up all of your debtors and bills receivables to compute trade receivables. That formula, however, isn’t beneficial on its own. Another method – the trade receivable days formula, often known as the debtor days ratio – might assist you in determining how long it takes your debtors to clear their bills:

Trade Receivable Days = Trade Debtors / Revenue * 365.

Example of Trade Receivables

Let’s look at an example to understand how trade receivable works in practice. Assume Company A has Rs.10,000 in various debtors on its balance sheet and Rs.12,000 in invoices receivable. Furthermore, Company A earns Rs.75,000 every year. The trade receivables can be calculated as follows:

Rs. (10,000 + 12,000) = Rs.22,000.

But how soon can Company A expect to get paid for these trade receivables? Let’s use the trade receivable days formula to determine their trade receivables collection period:

(22,000/75,000) *365= 107.06

As you can see, it takes Company A around 107 days to collect a standard invoice.

Why are Trade Receivables Significant?

Trade receivables are significant for a variety of reasons. Most significantly, they ensure that your company has a stable cash flow. Small companies typically suffer from a culture of late payments, increasingly common in numerous industries throughout India. You can ensure that your company’s cash flow stays strong by providing that trade receivables are collected on schedule.

Tips on Reducing Trade Receivables

  1. Try to provide as many payment choices as possible. Some customers prefer cash or cheques, while others prefer credit cards and internet payment transfers. You can encourage them and give them additional reasons to pay on time by providing various payment options.
  2. Offer early payment incentives and impose late payment fees. There is no greater motivator than money. Encourage clients to pay you back early by offering early payment incentives and small late payment fines so they don’t take advantage of free credit.
  3. Share a sales invoice as soon as you finish the project or supply the service you were hired for. The more you wait, the more likely the payment may be delayed.
  4. In ahead, send them an email with a payment reminder. Some clients are forgetful, and a brief email reminder a few days before payment is due will encourage them to repay their trade receivables on time.
  5. Consider asking for a modest advance deposit. If you’re working on a long-term project or selling a high-priced item. For example, asking for an early partial payment might assist lessen the chance of not being paid back.
  6. The shorter the duration of payment, the better. Although invoice periods differ by sector, it is to your best advantage to maintain payment terms as straightforward as possible – the sooner you get paid, the sooner cash flows into your organisation.
  7. Make a phone call to the client. Suppose the customer is unresponsive to your emails. In that case, you may always phone them to have a quick conversation to figure out what’s going on and why they’re delaying their payments.