What are trade receivables? Trade receivables are the amount owed to any business by the customers for selling them goods and services on credit. It is the amount or payment that a business can expect to receive in the future within a year from the customers or clients. Trade receivables are the current assets of a company. It includes cash, investments, prepaid expenses, supplies, inventory, foreign currency, etc. Trade receivable is an essential consideration while calculating the working capital.
How do you calculate trade receivables? It is not difficult to calculate trade receivables. Anyone can calculate trade receivables easily. Trade receivables is the total of all current outstanding invoices made for selling goods and services on credit to clients or customers.
Why should a company reduce trade receivables? A company should make efforts to reduce the trade receivables because increasing trade receivables shows the poor status of a company. It shows that the company is unable to convert its sales into cash.
How can a company reduce trade receivables? If a company receives the payment before the due date from the clients or customers for credit sales, trade receivables will reduce. But there are other essential suggestions and tips that you should follow to reduce the trade receivables of your company;
Invoice immediately for credit sales –
Do not delay the invoice processing. A company takes weeks to send an invoice to the clients or customers once you deliver the goods. The more you delay the invoicing, the more you receive the payments. So, do not take days or weeks for invoicing. Instead, invoice immediately within 48 hours once you fulfill the customers’ requirements.
Establish payments terms while invoicing –
It would help if you clarified your payment terms while invoicing. For example, you should mention in the invoice that you can charge a specific interest rate on late payments. So, customers will make sure that they will make payment before the due date. Also, if you receive payments in various modes, you should spell it out in the invoice. It can also increase the chances that customers will pay you on time using the payment mode that is preferable for them.
Send invoices faster –
You should send invoices faster to your customers or clients. You can send it online via mail or messaging apps. Sending invoices via mail speeds up the time as your customers or clients will receive them immediately after you have sent them out.
Offer discounts on early payments –
You can also provide discount offers for receiving payments on time. You can offer discounts on receiving early payments. Also, be very careful while mentioning the discount offers in the invoice. Ensure that you have mentioned the correct date of issuing an invoice and the early payment date for availing of discount offers.
Send the gentle reminder –
Keep sending gentle reminders to your customers or clients before the due dates of payments. Generally, every company uses this strategy to receive payments on time. So, you should also follow the same.
So, these are the essential tips or steps every company should follow to reduce trade receivables.
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