Trade debtors, also known as accounts receivable, are amounts owed to a company by its customers or clients for goods sold or services rendered on credit. 

When a company provides products or services to a customer without receiving immediate payment, it creates an account receivable or trade debtor (an asset to the business, shown in the balance sheet).

Trade debtors make up a vital part of working capital and can have a significant impact on its cash flow and financial health. Accordingly monitoring their collection is critical. 

Trade Debtor Days measurement is used by most businesses that extend credit. Trade Debtor Days measure the average number of days it takes for a company to collect payment from its customers / clients.

It is calculated as follows:

(Average Trade Debtors / Sales on Credit) * Number of Days

If you wanted to calculate the average amount of days that it took for your business to collect its receivable last financial year, then:

Accounts Receivable at 30 June 2024              $350,000

Account Receivable at 30 June 2025               $425,000

Total Sales on credit                                     $4,000,000

(350,000 + $425,000) / 2 / 4,000,000 * 365 = 35 days.

Generally, the smaller the number of days the better.

Some methods to improve you trade debtors / accounts receivables are:

1.       Send Invoices Promptly

•         Delays in invoicing often lead to delays in payment.

2.       Establish Clear Payment Terms

•         Show the due date and make it visible on every invoice.

•         Include penalties / interest for late payments and incentives for early ones.

3.       Enable Electronic Payments

•         Offer options like credit card, electronic funds transfer, or digital wallets.

4.       Automate Reminders and Follow-Ups

•         Use you raccounting software to send automatic reminders before and after the due date.

5.       Use AR Aging Reports

•         Regularly review which invoices are overdue and by how long.

•         Prioritize collections based on risk and age of debt.

6.       Maintain an Accurate Customer Database

•         Ensure contact details and billing info are up to date.

•         Mistakes in invoices can delay payments or cause disputes.

7.       Conduct Credit Checks Before Extending Terms

•         Evaluate a customer’s payment history and financial health.

•         Limit exposure to high-risk clients or require deposits.

8.       Offer Early Payment Discounts

•         A small discount (e.g., 2% for early payment) can motivate faster payments.

•         It’s genearlly cheaper than borrowing to cover cash shortfalls.

9.       Create a Clear Collections Policy

•         Define when and how you treat overdue accounts.

•         Include steps like phone calls, formal letters, and debt collectors.

10.      Train Staff on best Practices

•         Ensure your team understands the importance of timely invoicing and follow-up.

•         Provide them with tools and scripts for effective communication.

If you would like to discuss further, please contact us:
  

McNamara & Company - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandco.au/contact-us
 Phone +61 3 9428 1062
Email admin@mcnamaraandco.au

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