Trade receivables | Definition & importance

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    Credit control & accounts receivables

    Trade receivables | Definition & importance

    Trade receivables is a term used to describe the money owed by one company to another. In this article, we will discuss what trade receivables are, how important they are for business owners, and what you can do to reduce your company’s trade receivables.

    What are trade receivables?

    Trade receivables are the money owed by one company to another for products and services that have been sold. 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.

    Trade receivable days represent 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.

    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.

    A large number of trade debtors could indicate that a company is not implementing effective credit control, which could lead to bad debt and, in turn, lead to bankruptcy or liquidation.

    Trade receivables formula

    If you need to calculate your trade receivables, there is a simple and easy formula you can use:

    Trade Receivables = Debtors Receivables + Bills Receivables

    For example, if your debtors receivables is $20,000 and your bills receivable is $12,000; the trade receivables will be:

    Trade Receivables = 20,000 + 12,0000 = 32.000

    When it comes to estimating your trade receivable days, you can use the following formula:

    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 with 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.

    The flip side is that unmanaged trade receivables can also mean a cash flow crunch. Cash flow is one of the most important factors in the survival of a small business, so you should always be on top of your receivables.

    The better you understand them, 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 an accounting software like Xero or Quickbooks can help keep track of this information and innovative credit control platforms like Chaser to help you manage the process of reducing your trade receivable days.

    The primary value in understanding your trade receivables is that it will help you forecast your cash flow.

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    How can you reduce your company’s trade receivables

    The good news is that there are always ways to reduce your trade receivable days and improve your cash flow.

    You can do this by collecting outstanding receivables faster, reducing the amount of time that it takes to collect payment from customers after a sale has been made and finding out why some invoices are taking longer to be paid than others.

    To help you out, we've put together some easy to implement tips you can use to improve your cash flow:

    Send an invoice as soon as work has been completed

    As soon as you've completed your side of a contract, you should send an invoice to the client. This not only acts as a good reminder for your customer but also ensures that they don't forget about it and make payment before realising they need to.

    If there are any issues with sending invoices immediately after work is done - perhaps because of project delays or problems in getting approval from a manager - make sure you at least send them as soon as you resolve those issues.

    Include clear payment terms and the shorter the payment terms the better

    Payment terms are something you'll want to have agreed with your customer before you start working. Make sure you clearly understand what the payment terms are and if possible try to agree with them on how long they'll have from when your services or products have been delivered.

    For example, a common term is for 30 days after receipt of invoice but this could be 90 days depending on different factors such as volume of business, industry sector etc.

    However, while 30-days might be standard, there is no reason you can't use a shorter payment window.

    Try to agree with your customers on shorter terms where possible but at the same time don't ignore longer ones either because they may still add value in certain circumstances.

    Send a before-due email before payment is due to confirm that the customer has all information necessary to make payment and that’s there are no delays

    You don't need to wait until invoices have become overdue in order to remind your customers that they should be making a prompt payment. Send a pre-advice of an incoming invoice with the due date and payment terms clearly visible.

    It's always a good idea to remind customers of their payment obligations, and including this information in your invoices is one way to do it. This will help ensure that there are no surprises for either party and that payments are made on time.

    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.

    It's always a good idea to remind customers of their payment obligations, and including this information in your invoices is one way to do it.

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    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 one of our Payment Portals in every reminder email to make payment quickly and easily.

    Chaser Payment Portals 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.

    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.

    Sign up for a free trial today!

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