How can you effectively manage your supplier debts?

What are trade payables?

Trade payables are amounts owed by a company for goods or services it has purchased but not yet paid for . These are current liabilities and are an integral part of a company's cash management.

An example of supplier debt

Let's take two companies: HydraTech a manufacturer of reusable bottles, and CleanWater a supplier of water filters:

• On March 3, CleanWater delivers filter control to HydraTech, which receives and inspects them for quality .

• CleanWater sends the €10,000 invoice on March 5 with a 30-day payment period creating a supplier debt of the same amount for HydraTech.

• Respecting the terms, HydraTech made the payment on April 4, settling the debt.

How do you account for trade payables?

Where are trade payables located on the balance sheet?

In the balance sheet, trade payables are i nscribed as a liability in short-term debt They are usually settled within a year of issue.

They are recorded in the 401 "Suppliers "and can be broken down by maturity date .

How to tell if a company is highly indebted: the accounts payable turnover ratio

To assess supplier indebtedness, we use the trade payables-to-purchases ratio: this is the ratio of trade payables to purchases. accounts payable turnover ratio .

Supplier debts to purchases ratio = Supplier debts / Total purchases x 100

To illustrate, let's take a company with supplier debts of €50,000 (average over the year) for total purchases of €200,000 over the year. The ratio would then be 50,000 / 200,000 x 100 = 25%.

• A ratio of less than 10% is often considered as low This indicates that the company pays its suppliers promptly or negotiates advantageous payment terms.

• A ratio between 10% and 50%. can be considered as normal in a wide range of sectors.

• A ratio in excess of 50%. can be interpreted as high and could mean that the company relies heavily on supplier credit to finance its operations, which can be a sign of cash flow pressures.

It is essential to compare this ratio with those typical of the sector concerned They can vary significantly from one sector to another.

The impact of trade payables on a company's cash position

Trade payables have a significant effect on a company's cash flow, directly influencing the company's profitability. Working capital requirement (WCR) .

Impact on WCR

WCR represents funds required to cover the company's operating cycle . Delaying payment to suppliers can temporarily reduce working capital, offering ains i a form of free financing et increasing short-term cash flow .

Paying immediately on invoice increases working capital, requiring additional financial resources.

Legal payment terms - The LME Act

La French Law on the Modernization of the Economy (LME) in France regulates payment terms between companies setting a ceiling of 60 days from the date of issue of the invoice or at 45 days end of month . If the commercial contract does not stipulate a payment term, the standard legal term of 30 days applies.

Hero's role in WCR management

Hero offers a financing solution that enables companies to optimize their working capital. With a factoring inversé Hero helps companies pay their suppliers on time, while preserving their cash flow.

How can you finance your supplier debts?

Financing supplier debts is essential for sound cash management:

• Reverse factoring with Hero

Hero offers a solution for reverse factoring to pay suppliers while maintaining flexible cash flow .

It's a lever for optimizing working capital without damaging supplier relations.

• Bank cash credit

A cash credit is a fast option for managing liquidity gaps, suitable for one-off needs. It is also the most difficult type of credit for SMEs to obtain, according to the French Banking Federation .

• Other sources of financing

In case of need, companies can also turn to other sources of financing, such as fundraising the Revenue-Based Financing (RBF) or the research tax credits for innovative companies.

Why are supplier debts financial resources?

Supplier debt is a resource, since the company can use cash until the debt is settled.

Trade payables can be strategically used as a hedge against the risk of default. temporary financial resources . They enable extend available cash without recourse to an external loan .

Risks related to trade payables

This practice must be handled with care to avoid damaging the company's reputation. There are significant risks involved:

• Credibility risk

Excessive delay in the payment of supplier debts t damage a company's credibility This will affect its ability to negotiate good business relationships in the future.

• Opportunity cost

Rapid reimbursement can be costly . The advantage of greater cash flow must be balanced against the opportunity cost of this tied-up capital.

• Legal risks

Failure to meet payment deadlines can lead to litiges and, in extreme cases, even to judicial liquidation proceedings against the debtor company.

Managing supplier debts wisely is crucial to maintaining good financial health and solid relationships with business partners. Tools such as those offered by Hero can help companies optimize this management process.

What types of corporate debt are there?

A company's debts can be grouped according to their nature and maturity.

By cost element

• Financial liabilities : bank loans, bond issues, overdrafts, etc.

• Non-financial liabilities : supplier, tax, employee and social security debts, etc.

By duration

• Short-term : generally due within 12 months of the end of the financial year.

• Long terme : maturities beyond 12 months.

Par type

• Trade payables : amounts due to suppliers for purchases of goods and services.

• Tax and social security liabilities : taxes and social security contributions.

• Bonds : repayments due to bondholders.

• Borrowings from credit institutions : include overdraft facilities and contracted loans.

Each type of debt has different implications for financial management, and needs to be carefully monitored for optimum financial health.

Careful management of financial resources is crucial to sustainable growth. Rigorous monitoring of your trade payables has a direct impact on your company's solvency. Make an appointment with one of our Hero experts to discuss your needs.

Frequently asked questions

How do I settle a supplier debt?

To clear a supplier debt, you need to pay the amount due according to the established payment terms, often by bank transfer or cheque.

Who pays off a company's debts?

A company's debts are repaid by the company itself from its cash flow or via external financing.

Should debts be booked inclusive or exclusive of VAT?

Payables must be recorded inclusive of VAT, as it is the full amount that must be paid to the supplier.

Other articles on the same subject:

• Supplier payment terms: duration and rules to follow

• 8 business financing solutions: which one to choose?

• Start-up financing: the 8 best solutions

• How can you improve your company's cash flow easily?

• Need for cash: what is it and how to react?

• Customer outstandings: definition, calculation and instructions for use