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Cash Application
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Use cases

Trade Receivables

Offering credit terms to customers for products and services is a staple of business operations. While it is more common in the B2B industry, some B2C businesses also rely on a credit model. For example, dentists might offer installment payments to patients for procedures not adequately covered by their insurance companies. This business model creates trade accounts receivables.

What Are Trade Receivables?

“Trade receivables” refers to the total amounts owed to your company for the products or services sold to customers, but for which you have not yet received payments. Consequently, it projects cash flow for the business. How reliably business owners can predict these payments depend on the strength of their credit approval systems and the state of the economy or industry.

What Is the Accounting Process for Trade Receivables?

There are two primary forms of accounting: cash and accrual. For cash accounting, businesses record credits and debits when transactions occur and money passes hands. Accrual accounting records credits and debits at the time expenses or revenues are expected or accrued, even when they are not yet received. This creates accounting differences for trade credit.

The accountants debit the accounts receivable account and credit the sales account for businesses relying on the accrual system. Financial statements generally run for a calendar year, so only the expected repayment amount for the current accounts makes it to the current accounts. Meanwhile, the remaining balance goes to the non-current assets or investment accounts.

What Is an Increase in Trade Receivables?

This correlates with an increase in extended credit, so there are two possible meanings. The first is that the company made more sales than usual, which led to an increase in the amount of extended credit. It can also mean fewer customers have paid their bills on time and in full, which would then lead to larger figures for unrecovered receivables on the books.

Business owners can take steps to ensure an increase in trade receivables is for all the right reasons:

  • Establish procedures for reviewing the creditworthiness of each applicant and provide matching terms.
  • Provide incentives to customers that pay in full and on time, such as faster shipment or first-pick on available items.
  • Hire a competent accounts receivable team to manage the process of securing payments.
  • Leverage the power of technology to streamline the accounts receivable process and boost payments.

What Is the Connection Between Cash Flow and Trade Receivables?

As a business owner, you need cash to cover your own business expenses, such as payroll, utilities or loan repayments. Reduced cash flow trade receivables negatively impact the liquidity of the business. This could then force the business to take on more debt to pay for its own liabilities while awaiting payment from delinquent accounts.

Gaviti helps our clients avoid these worst-case scenarios by providing the tools they need to improve trade receivables payments and boost cash flow. Our software improves DSO, decreases the need for debt write-offs and automates some of the most tedious manual tasks handled by your A/R team.

Why take our word for it? Book a free demo to test it for yourself.

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