Trade Receivables: Calculation Examples and Importance of Ratio

In 2025, global receivables management is projected to exceed $17 trillion, underscoring the critical role trade receivables play in business operations. These outstanding debts are more than simply liabilities; they are the source of cash flow that keeps companies growing and thriving.

Effective trade receivables management ensures that businesses can maintain liquidity and avoid cash flow bottlenecks. In this article, we'll look into the process of trade receivables calculation, the importance of turnover ratios, and methods to streamline receivables management for better financial health.

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What Are Trade Receivables?

Trade receivables refer to the amounts customers owe a business after providing goods or services on credit. On the balance sheet, these funds are categorized as current assets, which indicates that they should be turned into cash soon, typically within 30 to 90 days.

Receivables are a critical component of working capital and represent the potential for cash inflows, which businesses rely on to pay for expenses, reinvest in growth, or return profits to shareholders. Maintaining financial stability and business operations requires an understanding of how to calculate and manage trade receivables accurately.

Now that we have a solid understanding of trade receivables, let's explore how to calculate them.

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Trade Receivables Calculation: The Formula and Example

The trade receivables calculation is simple but vital for tracking a company's outstanding debts. The formula is:

Trade Receivables = Bills Receivables + Debtors

• Bills Receivables: Amounts owed by customers for goods or services that are supported by a bill of exchange or formal document.
• Debtors: Amounts owed by customers on credit terms, typically without a formal bill of exchange.

Example Calculation:

Let’s assume that a business has the following:

• Bills Receivables: $50,000
• Debtors: $150,000

Using the formula:

Trade Receivables = $50,000 + $150,000 = $200,000

This means that $200,000 in trade receivables are owed to the company. Accurately tracking and calculating trade receivables is crucial to making sure a company is successfully collecting the amounts due.

After learning how to compute trade receivables, let's look at a crucial indicator that will show you how well your company is collecting these accounts: the receivables turnover ratio. 

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The Trade Receivables Turnover Ratio

The trade receivables turnover ratio measures how efficiently a business is managing and collecting its receivables. The formula to calculate this ratio is:

Receivables Turnover Ratio = Net Credit Sales / Average Trade Receivables

This ratio shows how often the company collects its average amount of receivables during a specific time frame, usually a year. A high percentage indicates quick receivables collection, which is a good sign for cash flow and liquidity. 

Example Calculation:

Let’s say a company has Net Credit Sales of $1,200,000 and Average Trade Receivables of $300,000.

Receivables Turnover Ratio = $1,200,000 / $300,000 = 4

This means that, on average, the company collects its receivables four times per year.

Importance of the Turnover Ratio:

• Effectiveness in Debt Collection: A higher turnover ratio denotes an effective collection of receivables.
• Cash Flow Implications: If the ratio is low, it may indicate that receivables are not being collected promptly, which could cause problems with cash flow.
• Optimizing Credit rules: By keeping an eye on this ratio, companies can modify their credit rules to make sure they aren't holding too many receivables, which could limit cash flow.

As businesses work on optimizing their turnover ratios, let’s look at the factors that can influence trade receivables.

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Factors Affecting Trade Receivables

Several factors impact the trade receivables balance of a company. Businesses can lower the risk of bad debt and improve receivables management by being aware of these.

The above chart shows the impact of credit terms longer than 90 days on trade receivables. As indicated, businesses offering longer credit terms are expected to see an average increase of 18% in trade receivables in 2025. 

1. Credit Sales Volume: Higher sales on credit naturally increase trade receivables. Strong credit policies should be in place for businesses to avoid exposing them to excessive amounts of past-due debt.
2. Collection Efficiency: A healthy balance of receivables depends on prompt collection attempts. Cash flow can be impacted by excessive outstanding amounts resulting from poor collection tactics.
3. Credit Terms: The terms offered to customers, such as payment periods, can significantly affect the age and size of receivables. Longer credit terms may result in a longer collection period.
4. Allowance for Doubtful Accounts: Businesses must account for the risk of non-payment by customers. An allowance for doubtful accounts is created to prepare for potential bad debts, impacting the trade receivables balance.
5. Seasonality: Sales in several businesses fluctuate during particular times of the year (e.g., retail during holidays). Seasonality can affect trade receivables, as businesses may have higher receivables at certain times of the year.

Now that these crucial elements have been identified, let's discuss strategies that can enhance trade receivables management.

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Strategies for Managing Trade Receivables

Keeping a steady cash flow requires efficient trade receivables management. Below are several strategies that businesses can use to improve both receivables management and turnover ratios:

• Boost Collection Efficiency: To cut down on delays and increase collection accuracy, automate reminders for invoices and payments. Timely follow-ups with customers who have outstanding debts can significantly reduce the ageing of receivables.
• Establish accurate Credit Policies: Give clients accurate information about their credit limitations, terms of payment, and collection processes. To prevent bad debt accumulation, ensure that your workforce is aware of the policies and adheres to them consistently.
• Provide Early Payment Discounts: Provide clients with a little discount for early payment to encourage on-time payments. Offering a 2% discount for payments made within ten days, for instance, can encourage clients to make their payments on schedule.
• Outsource Collection to Third Parties: When internal resources are stretched thin, consider outsourcing collection efforts to specialized agencies like South East Client Services (SECS). They can help recover past-due accounts while upholding compliance and protecting the reputation of your company.
• Utilize Data Analytics: Track customer payment patterns and forecast future payment patterns with analytics. This proactive strategy might assist in managing expectations and following up with customers before financial issues arise.
• Regularly Evaluate Customer Creditworthiness: To prevent giving credit to high-risk customers, evaluate customers' creditworthiness on a regular basis. As a result, fewer trade receivables may be at risk of turning into bad debts.

Implementing these strategies helps businesses shorten cash cycles, strengthen financial planning, and protect liquidity.

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Conclusion

Effective handling of trade receivables is essential for preserving cash flow and supporting business growth. Businesses can increase liquidity and lower financial risks by precisely assessing trade receivables, keeping an eye on turnover ratios, and putting effective collection measures into place.

With a focus on optimizing the receivables process, South East Client Services (SECS) provides solutions that increase collection effectiveness while upholding legal requirements. Their expertise guarantees that companies can manage past-due bills without compromising client relations.

Are you ready to manage your receivables more effectively? Contact SECS right now to find out how they can assist you in enhancing financial performance and increasing cash flow.

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