Having trade debtors is a normal and expected part of business, especially for Startups. But as a business owner, you must exercise caution when dealing with trade debtors, as they can affect your business's cash flow and profitability.
Keep reading to learn all about trade debts and receivables.
What are trade debtors?
A trade debtor sometimes called an account receivable, is an accounting term used to refer to the money payable to a business or company for goods and services that have been delivered but not yet paid for.
Put simply, trade debtors are those customers that owe you money. These debts are usually short-term or mid-term - mostly within a month or a year.
They are also referred to as trade creditors, depending on which side of the transaction it falls.
When you raise an invoice for goods delivered, you create a trade debtor on your balance sheet. But on your customer’s accounts book, the invoice will be entered as a trade credit.
This takes us to whether trade debts are assets or liabilities.
Trade debtors: assets or liabilities?
Assets can be said to be anything that would yield money at a later time. On the other hand, liabilities are defined as something that a company owes another party, such as a debt or an obligation. So trade creditors will be a part of your current liabilities.
Due to the name, it is easy to mistake a trade debt for a liability. However, trade debtors are company assets. This is because account receivables or trade debts can be converted into money in the future - when the customer pays up.
Accounts receivables can be entered as current assets respectively. Liquid assets are assets that can be converted into cash within a short time. In contrast, other assets , (i.e., fixed assets) are assets that your business can hold for longer than a year.
It is important to note that the classification of trade debtors as assets is based on the assumption that the company can collect the debt owed within the agreed-upon period. In the event that the customer is unable to pay, then the amounts must be re-entered as a liability. To prevent this from happening, you have to up your invoicing and bookkeeping game.
Trade debtors vs. trade receivables
Trade receivables and trade debtors are two sides of the same coin. They are often used interchangeably without any consequence on the company's bookkeeping.
While a trade debtor is created when a customer buys a good or service on credit, the money owed to the company by the customer is known as a trade receivable. So, for example, if Company A sells a good to Company B for $500, and company B agrees to pay it back in 60 days' time. Company B becomes the trade debtor, while the $500 is the trade receivable. If your balance sheet is prepared before the end of the 60 days, it will show a trade debtors figure of $500.
A company’s accounts receivable can either be trade or non-trade. Non-trade receivables are receivables due to a company for non-commercial actions. An example would be money for a loan transaction between Company A and Company B.
How to manage trade debtors
When a company sells goods and services on credit, it is taking a risk that the customer may not pay the full amount as and when due. Your company must take steps toward having a standardized bookkeeping system to mitigate this risk and ensure you are receiving payment.
1. Set out your credit terms
When negotiating, it is always best to spell out the payment terms. If possible, draft a written agreement. We understand that money may be a touchy topic, especially for SMEs. However, to avoid future disagreements, it is best to be clear about it.
Establish clear terms and conditions for credit, including the payment period, default fees, payment structure and options, and other relevant details. Make sure your customers are aware of these terms before extending credit.
2. Run credit checks:
Before extending credit to a new customer, it is best to run a credit check to determine their creditworthiness. This can help you assess the risk of extending credit and how much credit to extend to a particular customer.
3. Swift and accurate invoicing:
Make sure to be swift and fastidious when you send invoices. Doing this will increase your chances of getting paid timeously and avoid misunderstandings or disputes.
Also, when sending invoices, always send the invoice directly to the officer in charge of money and payment to fast-track the payment process and cut out unnecessary bureaucracy.
4. Follow up on overdue payments:
Despite putting all the right checks in place, customers may still need to catch up on their payments. You should also follow up on customers by sending gentle reminder emails and calls for late payments. It is always advisable to give ample notice to the customer.