Updated on: Apr 21st, 2022
3 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.
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 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.
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.
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.