What are trade debtors?

If you’re looking for a trade debtors definition, look no further. We explain the difference between debt and debtors, how these differ from creditors, and how to ensure a steady cash flow through your business.

Simply put, ‘trade debtor’ is a term given to describe a customer who hasn’t yet paid for goods or services. These customers are in debt, until they pay their invoices.

The trade debtors in a balance sheet refer to the sum of a customer’s unpaid invoices at a given time. These are current assets, as it’s assumed they will be collected by their due date.

This trade debtor's total will include VAT if your business is registered to pay it.  

For example, you issued an invoice to a customer for £1,000 at the start of the month. Then, a week later they order a further £500 worth of goods. At the month’s end, your balance sheet will show a trade debtor figure of £1,500 for this customer.

You may also hear the term ‘loan debtors’. This is similar to trade debtors, but involves lent money rather than the purchase of products or services.

The key thing to think about when discussing the different between trade receivables debtors or creditors, is understanding to whom cash is owed. Your trade debtors are customers who are in debt to you, whereas trade creditors are businesses or individuals to whom you are in debt.

Trade creditors in your balance sheet are accounts payable and are an important part of your business’ cash flow management as they can help you maintain financial health.

Other types of creditors could include financial institutions, such as banks, or service providers, like utility companies.

‘Trade receivables’ is another name for ‘account receivables’.

Accounts receivable (or AR) is the balance of money owed to a company for goods and services that have been delivered but not yet paid for.

It’s the money your customers currently owe for things you’ve already done. Each invoice is noted on your company’s balance sheets, and your customers are legally obligated to pay the debt.

Therefore, our trade credit insurance protects businesses’ ‘trade receivables’ from ‘trade debtors’ who default on payments and resulting bad debt.

To understand your finances at the end of the year, you may choose to do some sums and calculate how quickly your business has been paid. For this, you’ll need to use an average trade debtor formula.

For the annual period, divide your receivables by annual net sales, and then multiply this figure by 365 days.

For example, if you have £30,000 yet to be paid, but have made £320,000 in the past year, calculate:

(30,000/320,000) x 365 = 34.22 trade debtor days

This means, on average, it’s taken just over 34 days for your invoices to be paid.

A ‘good’ amount of debtor days will vary from business to business. However, a high debtor day number could suggest cash flow issues. Reducing your debtor days is a sign that your business efficiency is improving.

Calculating debtor days using a trade debtor formula is great for understanding collections, but do you know how long you take to pay your creditors? After all, a high number of creditor days could again suggest cash flow issues.

To work this out, use a creditor days formula: Divide any outstanding creditors by the annual cost of sales, then multiply the figure by 365.

For example, if you owe £35,000, but have a cost of sales of £500,000, calculate:

(35,000 / 500,000) x 365 = 25.55 trade creditor days

Understanding the difference between trade debt and credit, and how much you have in accounts receivables, are important for managing your business’ financial health.

It’s a balancing act. Too many debtors could lead to cash flow issues, and too many creditors could put strain on the business.

For many, successful debtor and credit management is ensuring their business is in the black. This means there’s a steady flow of cash through the business, bad debt is reduced, and funds are available to invest in growth.

For the benefits of cash flow management and some tips on how to improve yours, read: Business cash flow management: understanding the basics.

Everyone wants their trade debtors to clear their invoices on time. However, this doesn’t always happen. So, it’s important to protect your business should your debtors begin to significantly affect your cash flow.

A policy with Allianz Trade means that your cash flow will be secured and your receivables due within 12 months are covered.

We help our customers to avoid bad debt and compensate if it happens.

Explore Allianz Trade cover