What Are Trade Payables? Benefits and Risks
Businesses frequently sell goods and services to customers who, in return, agree to pay for them later. This is known as “accounts receivable” or trade payables, and is a very valuable form of revenue for many businesses. Understanding the benefits and risks associated with trade payables is essential for managing such transactions effectively.
An Overview of Trade Payables
Trade payables are the amounts that a business owes to its trade creditors (suppliers) in exchange for goods or services received. The account listed on a company’s balance sheet as “trade creditors” format, is usually classified under the term “accounts payable” or “trade payables.”
In simple terms, when a business buys something, it’s normally on credit and the payables allocated to the creditor or supplier who supplies the goods or services. They will meticulously note down the date of purchase, the quantity of the items purchased, and the rate per item or the price of the services.
Once the transaction has been completed, the creditor will enter the details of the transaction in the company’s books and the company pays the creditor in due course. The trade creditors’ accounts show the cash outflow of the company, namely the payments due to the creditors in exchange for the supplies purchased by the company.
Benefits of Trade Payables
Trade payables offer a number of advantages to businesses that are making financial transactions with their suppliers, customers, and vendors. Here are the most common benefits:
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Improved Cash Flow – Trade payables enable businesses to maintain a good relationship with their suppliers by providing the ability to pay their suppliers on time and manage their cash flow more effectively.
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Better Credit Terms – Trade payables can improve the terms of credit that companies can obtain from their suppliers. This leads to a more advantageous financing situation for the businesses.
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Higher Profits – Accruing trade payables can result in higher profits as well, since the money owed to suppliers is not included in the expenses associated with the purchase of goods and services.
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Reduced Inventory Costs – By using trade payables, businesses can reduce their inventory costs since the money owed to suppliers is not counted as an expense incurred for inventory. This can lead to lower overhead costs.
Risks of Trade Payables
While trade payables offer great benefits to businesses, there are certain risks associated with them as well. Here are the most common risks associated with trade payables:
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Unpaid Liability – One of the primary risks associated with trade payables is that of unpaid liability. If the company fails to pay its suppliers on time, the creditors can take legal action and demand payment.
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Reputational Damage – Another risk of trade payables is that of reputational damage. Delayed payments or an accumulation of payables can not only lead to legal trouble but also damage a company’s reputation.
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Increase in Overdue Accounts – One of the common risks associated with trade payables is the risk of an increase in overdue accounts. This can lead to cash flow problems as the company struggles to pay its outstanding debts.
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Uncollected Bad Debts – The risk of uncollected bad debts is another pertinent risk associated with trade payables. This can be due to various reasons, such as faulty delivery of goods, slow customer payment cycles, or non-payment by customers.
Trade payables are a valuable source of revenue for businesses, offering improved cash flow, better credit terms, higher profits, and reduced inventory costs. Despite offering these advantages, there can be risks associated with trade payables as well, such as unpaid liability, reputational damage, an increase in overdue accounts, and uncollected bad debts. Thus, businesses should be aware of both the benefits and risks associated with trade payables and manage them carefully.
