What are Trade Receivables and What Do They Mean for Your Business?

What are trade receivables (definition)?

Trade receivables, also known as accounts receivable, represent the amount of money that your business has billed its customers but has not yet collected. This can include unpaid invoices as well as flexible payment options, such as B2B Buy-Now-Pay-Later (BNPL)

When it comes to the accounting side of business finances, these are recorded as current assets (i.e. assets you hold) on the balance sheet, as they are expected to be converted into cash within a short period, which is typically 30 to 90 days. For most B2B businesses, trade receivables will make up one of the largest assets on your books, alongside other considerations like property, machinery or equipment.

Trade receivables formula

When it comes to understanding the value of your trade receivables, you can use a few figures from your balance sheet alongside this simple formula:

Trade Receivables = Debtors + Bills Receivables

In this scenario:

• Debtors: customers who owe you money for sales on credit.
• Bills receivables: Invoices you’ve issued but haven’t yet been paid for.

Adding these together gives you a snapshot of how much capital is currently tied up in unpaid invoices, either through arranged credit agreements or outstanding or late payments. 

While this can help you understand the gross figure of outstanding balances, the more useful metric is the trade receivables collection period, which helps you assess how long it takes, on average, to collect payments:

Collection period (days) = trade debtors / revenue x 365

Trade receivables formula example 

Imagine your business has £14,000 owed by customers. This includes £9,000 from debtors (customers who haven’t paid yet) and £5,000 in outstanding bills receivables (invoices that are still within their payment terms).

So, in this case:

Trade receivables = £9,000 + £5,000 = £14,000

Now, to find out how long it takes on average to collect these payments, you calculate the trade receivables collection period using this formula:

Let’s say your annual revenue is £120,000. The calculation would be:

Collection Period = (£14,000 ÷ £120,000) × 365 = 42.5 days

This means it takes your business around 43 days on average to collect payments from customers.

A collection period of 43 days might be perfectly fine if your payment terms are 30–45 days. However, if your standard terms are 14 days, this could indicate that customers are paying late, which could put pressure on your cash flow. 

How are trade receivables recorded?

When a business sells goods or services on credit, it creates an asset because the company is now owed money by the customer. To record this transaction:

• The trade receivables account is debited, which increases the value of the assets your business holds.
• At the same time, the sales revenue account is credited to reflect the income earned from the sale.

This entry shows that while the payment hasn’t been received yet, the sale has been made, and the business expects to collect the money in the future.

When the customer makes the payment, the transaction is recorded to reflect the change from an outstanding receivable to cash on hand:

• The cash account is debited, increasing the business’s cash balance.
• The trade receivables account is credited, reducing the amount owed since the customer’s debt has been settled.

This makes sure your financial statements always present an accurate picture of your business’s financial health, with clear indications of both the income you’ve earned and the payments you’re still expecting. 

What are the risks of trade receivables?

While extending trade credit terms can be a handy way to help customers spend more and build trust, there is an inherent risk in waiting longer to get paid.  FSB research found that 52% of small businesses experience late payments each quarter, with knock on effects for those further down the supply chain and putting more pressure on business finances.

Key risks to watch out for include:

• Late payments – Delays in customer payments leave you with less working capital to manage your day-to-day operations while you wait to get paid.
• Bad debts – Some customers may default entirely, leaving you holding debts that may never be settled.
• Administrative workload – Tracking and collecting receivables requires time and effort, from chasing invoices to managing delayed payment reconciliation.

How to use technology to streamline trade receivables management

The workload of managing trade receivables can quickly add up, with SMEs spending between 21-30 hours per month actively following up on overdue invoices. Investing in the right tools can make a big difference to your efficiency, visibility and success rates when it comes to getting paid.

• Automated Invoicing: Cloud accounting platforms like Xero or QuickBooks help generate and send invoices automatically, with built-in reminders for customers.
• Buy Now, Pay Later (BNPL) Solutions: Instead of just extending credit on your own balance sheet, services like iwocaPay can help your business offer customers flexible payment terms while getting paid upfront​​.
• Trade receivables financing: Some businesses use invoice factoring or invoice discounting to sell outstanding invoices to a third party for immediate cash.

How does BNPL impact trade receivables and cash flow?

For businesses that want to reduce trade receivables risk, offering B2B Buy Now, Pay Later (BNPL) options in partnership with a provider like iwocaPay can help you improve your trade receivables management in a few ways:

• Immediate cash flow: You get paid upfront, reducing the risk of late payments.
• Higher sales volumes: With the ability to delay payment, customers are more likely to make purchases and increase their spend.
• Reduced credit risk: With B2B BNPL, the provider assumes responsibility for collecting payments from the customer, meaning there’s no need to rely on trade credit insurance.

What are the legal considerations for managing trade receivables?

Any business extending trade credit has to consider the legal responsibilities of extending payment terms, and the risks that come with it. 

• Setting clear payment terms: Invoices must always include due dates, late payment penalties, and interest rates that make the conditions clear to both parties.
• Credit checks: If you’re offering credit, it’s essential to first make sure that the customer can take on the debt. This means checking customer creditworthiness before extending credit to avoid defaults and potential disputes.
• Debt collection regulations: The procedures for collecting debts are tightly regulated. If you’re following up on an overdue payment, ensure you comply with the relevant rules.

How to check customer creditworthiness

Checking your customers’ ability to repay can help you avoid bad debts and disputes. 

• Start by checking the customer’s credit report through agencies like Experian or Equifax. These reports provide insights into their financial history, including credit scores, payment behavior, and any outstanding debts.
• Next, review their payment history, especially if you’ve worked with them before. Look for patterns of late payments, which can signal cash flow issues. 
• If they’re a new customer, request trade references from other suppliers to get a sense of their reliability in settling invoices.

Based on the information gathered, set a credit limit (acceptable level of debt) that reflects the customer’s financial stability and payment track record. 

How to manage and collect trade receivables

Managing your trade receivables is a key part of maintaining consistent, reliable revenue. While it can be tempting to simply adapt your payment processes with every new customer request, it’s essential to maintain a clear and consistent strategy that aligns with your commercial goals.

1. Set clear payment terms: Ensure invoices specify due dates, penalties for late payments, and accepted payment methods.
2. Invoice quickly and accurately: The longer you wait to invoice, the longer you’ll be waiting to get paid, so make sure to send invoices immediately after goods or services are delivered.
3. Make reminders seamless: Remembering to chase invoices is time-consuming and inefficient, so use automated reminders to prompt customers before payments are due.
4. Make early payments attractive: Offering discounts for early payments can encourage customers to settle invoices faster.
5. Plan ahead for challenges: Having to work out what your debt collection plan once it happens can lead to mistakes and damaged relationships. Make a clear policy and share it with your clients so they understand the conditions of non-repayment. And if payments remain outstanding, have set processes for escalating the process with legal warnings or involving a debt recovery agency.

Make your trade receivables work for you

Staying on top of your trade receivables can make the difference between a steady cash flow and awkward financial gaps when you least expect it. With the right tools on your side, you can improve cash flow, reduce the risk of late payments, and support sustainable growth.

iwocaPay is a complete partner for offering trade credit, managing payment risk and implementing omni-channel B2B payments. With our support, you can streamline your trade receivables management and keep your business on track, without the manual work of managing trade credit.

• Get paid in full upfront while offering flexible payment terms to your customers
• Eliminate the hassle of chasing late payments—iwocaPay handles it for you
• Improve your cash flow and reinvest in your business with confidence

Ready to simplify your receivables process and get paid faster? Discover how iwocaPay can help today.

Trade Receivables FAQs

Are trade receivables an asset?

Yes, trade receivables are considered an asset because they represent money owed to your business by customers for goods or services you’ve already provided.

Are trade receivables a current asset?

Yes, trade receivables are classified as a current asset because they are typically expected to be converted into cash within a year, usually within 30 to 90 days.

Are trade receivables an asset or a liability?

Trade receivables are an asset, not a liability. They represent incoming funds that your business is owed, whereas liabilities represent money your business owes to others.

Are trade receivables a debit or credit?

Trade receivables are recorded as a debit in accounting because they increase your company’s assets. When payment is received, the trade receivables account is credited to reflect the reduction in the amount owed.

What is the average settlement period for trade receivables?

The average settlement period varies by industry but typically ranges from 30 to 90 days. A settlement period measures how long, on average, it takes for customers to pay their invoices.

What is the trade receivables ratio?

The trade receivables ratio, often referred to as the receivables turnover ratio, measures how efficiently a business collects its outstanding debts. It’s calculated as Net Credit Sales ÷ Average Trade Receivables and helps assess how quickly receivables are converted into cash.

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