Accounting and bookkeeping are some of the roles that many business owners dread the most.
Terminology like “trade receivables” and “trade debtors” doesn’t help, but the reality for most businesses is that the two terms are one and the same.
Trade debtor are invoices owed to you for goods or services supplied. It can also relate to entities or people that owe you money.
Trade receivables mean almost the same thing – except that your business may be owed money for something else other than goods or services.
So, without further ado, let’s take a look at the definition of these two terms, their formulas, and their importance.
Trade receivables meaning
What are trade receivables?
Trade receivables (or accounts receivable) are the total amount that a business has billed to a customer for goods and services that they’ve supplied but are yet to receive payment for.
This bill is reflected in a company’s invoice that it sends to its clients.
Trade receivables formula
There’s an easy formula for calculating your trade receivables, but you need to access your balance sheet.
Trade receivables = debtors + bills receivables
Add up your bills and debtors’ receivables from your business balance sheet to get your trade receivables.
There’s also the trade receivables days formula (or debtor days ratio) that helps you estimate how long your debtors take to pay your bills.
Trade receivable days = trade receivables / revenue x 365 days
Trade debtors meaning
These are invoices that customers owe you on your balance sheet. Businesses sometimes refer to these amounts as trade debtors.
Trade debtor days measure how quickly a business gets paid. In other words, it’s the average amount of time a company takes to collect debts from its customers.
Trade debtors formula
There are different formulas to calculate your debtor days depending on the context in which you need to understand them.
Debtor days = trade debtors / revenue x 365 days
Count back method
This method is useful for calculating debtor days for shorter periods on an ongoing basis. It accounts for monthly fluctuations due to irregular sales.
Year-end method
You can use this method to check if your debtor days have become longer or shorter this year in comparison to last year.
Importance of trade receivables and trade debtors
They ensure a healthy business cash flow.
There’s currently a trend of late payments across many industries in the UK. These late payments can lead to the downfall of many small businesses.
According to a report from the Department for Business, Energy & Industrial Strategy, almost 25% of UK businesses say that late payments are a threat to their survival.
Summary
In summary, you should try to stay on top of any overdue payments by setting clear payment terms and supplying invoices for goods and services on time; this should entitle you to get paid on time too.
Having a system in place will help you to avoid chasing payments and improve your business’ chances of survival.
You can use software or hire a competent accountant to help you with your calculations and send reminders one or two days after debts become due.
At Accountants East London, we can add value to your small business by offering professional accountancy services – at a price that won’t break the bank!
