🔥 HERO raises €11.3 million from US investment fund Valar - Find out more! 🔥
How to calculate a trade receivable
Temps de lecture : 4 minutes
A trade receivable is a sum of money owed by a customer for goods or services supplied on credit. This asset often represents more than a quarter of the balance sheet total. With the risk of non-payment and the importance of good cash management, you need to know how to calculate your trade receivables.
Sommaire
How do you calculate trade receivables on the balance sheet?
To obtain total accounts receivable, simply Add up all unpaid customer invoices . Do not count invoices that have been paid.
Example of how to calculate trade receivables
Let's take the following example: You issued three invoices in June.
Invoice no. 1: €1,000, issued on June 1, with a payment term of 30 days.
Invoice no. 2: €2,000, issued on June 10, paid on June 24.
Invoice no. 3: €500, issued on June 20, with a 30-day payment deadline.
Today is July 3. You have 1,500 in trade receivables (invoices no. 1 and 3), including €1,000 in arrears (invoice no. 1).
Other calculations for analyzing your trade receivables
To go beyond simply tracking your invoices, there are several calculations that can provide you with key indicators of the health of your accounts receivable.
Calculating receivables in days: average payment term (APT)
DSO, or Days Sales Outstanding indicates the DSO (days sales outstanding) that it takes to collect payment after a sale. To calculate it, divide total accounts receivable by total sales, then multiply by the number of days in the period:
DSO = (Total accounts receivable / Sales) x number of days in period
Time-to-cash ratio
This ratio reflects the actual collection time in relation to the theoretical time allowed. This period is either written into your commercial contract, or is equal to the legal 30-day period. Compare the DSO with the average contractual payment term to see whether you are collecting faster or slower than expected:
DSO ratio = DSO / Average contractual payment term
Late payment rate (rates due)
It represents the percentage of invoices not paid when due. Calculate it by dividing overdue receivables by total receivables:
Overdue rates = Total overdue invoices / Total trade receivables
Customer aged trial balance
The customer aged trial balance is a tool detailing the age of receivables . It classifies invoices by time intervals since their due date (30 days, 60 days, etc.). The older the receivable, the greater the risk of non-payment. Here's an example of an aged trial balance
| Customers | Receivables due in less than 30 days | Receivables between 30 and 60 days | Receivables over 60 days |
|---|---|---|---|
| Customer 1 | 10 000€ | 1 000€ | 0€ |
| Customer 2 | 5 000€ | 1 000€ | 0€ |
| Customer 3 | 3 000€ | 4 000€ | 7 000€ |
Cash flow forecast
This table forecasts future cash flows based on invoice due dates and customers' payment history. It helps you plan financing requirements or investments. It can help you avoid a cash flow shortfall. Here's a simplified example of a cash flow forecast for the 1st quarter of the year:
| January | February | Mars | |
|---|---|---|---|
| Total cash receipts | 30 000€ | 50 000€ | 50 000€ |
| Total disbursements | 40 000€ | 20 000€ | 20 000€ |
| Cash balance | 10 000€ | 40 000€ | 70 000€ |
Calculating impairment of trade receivables
For receivables at risk of non-recovery, an impairment must be estimated. This is calculated by multiplying each receivable by an estimated non-recovery rate. This is based on :
Customer history
They are profil
Recent events (e.g. receivership or liquidation)
Depreciation is calculated per individual receivable as follows:
Impairment of receivable = Amount of receivable x (1 - Probability of non-recovery)
Track late payments by cause of delay
Two-thirds of entrepreneurs are regularly faced with late payment problems, and this threatens the business of 10% of them.
Identifying the reasons for late payment is essential to prevent and manage them. Common causes include :
Billing errors
Delivery errors
Disputes over delivered products or services
Customer's cash flow problems
Lack of an effective recovery process
Errors in bank details
This allows you to distinguish between your customers' financial difficulties and everyday problems .
How do I register a trade receivable?
To register a customer receivable, you must :
Issue an itemized invoice including VAT.
Enter invoice in sales journal.
Record the receivable in the "Accounts receivable" account (411).
Monitor payments and follow-up if necessary.
Should trade receivables be recorded as assets or liabilities on the balance sheet?
Trade receivables must be recorded on the assets side of the balance sheet They represent sums of money that the company must receive from its customers.
In which accounts are trade receivables recorded?
Trade receivables are recorded in class 4 accounts of the general chart of accounts, along with other receivables: more specifically in account 411 "Customers .
Should trade receivables be entered inclusive or exclusive of VAT?
Accounts receivable are recorded in the accounts inclusive of VAT.
For companies that are exempt from VAT, or in other specific cases, receivables can be recorded exclusive of VAT, as they do not collect VAT on their sales.
With all these elements, you'll know how to perform the most important calculations for your accounts receivable .
If you'd like to optimize your cash flow by speeding up your collections or making it easier for your customers to pay, Hero has all the solutions you need. Talk to one of our experts today:
Other articles on the same subject:
