There are loads to do for you in your business without having to understand the accounting jargon, so to make your life a bit easier, I’m going to explain what Trade Debtors or Accounts Receivables are and how they impact you and your business.
trade debtors or accounts receivables
Trade Debtors and accounts receivable mean the same thing; they indicate what you’ve invoiced for your customers, and it’s on credit terms.
The standard credit term for most businesses is 30 days, but this can change to 7 – 14 – 60 days or even longer. This means that your customers owe you money, which is your sales and VAT id you are VAT registered.
Your income is recognised when you physically do the work, so when you invoice a customer, this income is going to go into your profit and loss account as income, not when you get paid for it.
The amount you invoice could include VAT if you are VAT registered and will sit within Trade Debtors or Accounts Receivables.
This stays within your balance sheet as an asset until it is paid.
So, if a customer owes you £1000 plus VAT, £1200 will be in your balance sheet as trade debtor or accounts receivable. When your customer actually pays you this money, the £1200 will go into your bank account, and the trade debtor balance will go down to £0.
Credit Terms
So, one thing to bear in mind when you’ve got credit customers is to keep an eye on making sure they’re actually paying within their credit terms. It can be common for people to stretch it out a bit further, and it’s sometimes a well-known practice.
Because if people get an extra week or two, or even longer, they are getting you to fund their business for free.
So, when you’re looking at your accounts receivable, make sure that you understand who is paying within the agreed credit terms or taking advantage of your business. Do you have customers paying late?
The more you have control over this, the more money will be sitting in your bank account instead of theirs.
So, make sure that you are reviewing this regularly, as this can have a huge impact on your cash flow.
VAT and Trade Debtors
When you’re looking at the amount that’s sitting in your accounts receivable, bear in mind that it is not just income that your customers owe you, this could also be VAT if you are registered. This means you also need to understand when is your VAT paid.
If you’re a certain size of business, you can opt for cash accounting, which means you pay the VAT when you get paid.
However, if you are on invoice accounting, you are paying the VAT when you are invoicing, and you may be paying the VAT before you’ve actually received the money from your customers.
In summary: your accounts receivable is going to be the total of what your customers owe you at any given time if you’ve agreed to give them your product or service on credit terms.
You should review this on a regular basis because black holes in cash flow are sometimes buried within Trade Debtors.
In order to grow your business, you need to make sure that you are getting paid on time, otherwise, you could face difficulties with cash flow and paying your liabilities.
I hope you find this article helpful, and if you have any questions, feel free to book a free discovery call with me. I will take on board any questions you might have without a pushy sales pitch.
