In order to maintain healthy cash flow for your business, you need to keep a close eye on the top and bottom lines. This means accurate and detailed reporting of your revenues and your expenses, some of the most common of which are your trade payables.
Here we’ll get to know trade payables, how they differ from their opposite (trade receivables) and how to account for them properly to ensure harmonious cash flow.
Trade payables definition
So, what is a trade payable? Businesses encounter these kinds of liabilities all the time, even if they’re not familiar with the term. Trade payables are any expenses incurred from vendors, suppliers or other third parties for goods or services provided in bringing their products to the customer.
Trade payables are a combination of the creditor/s and the bills payable for goods purchased or services rendered.
In accounting, the amount billed by the vendor or supplier is the amount logged under “accounts payable”. However, these are only logged if they are paid on credit. If amounts owed to vendors are paid immediately in cash, they are not logged as trade payables as they are no longer liabilities.
Trade payables are generally classed as current liabilities, since payment is usually expected within 12 months or less.
The purpose of trade payables
Accounting for trade payables is important as it helps companies to understand the cost of doing business. The better able they are to quantify the bottom line, the better positioned they are to gauge their profitability and enact changes to increase their profit margins.
Trade payables examples
Not all business expenses are classed as trade payables. For instance, employee wages, while part of your everyday operational costs, are not counted among trade payables. Neither are employee expenses or dividends payable.
There are lots of examples of trade payables that businesses encounter, and these can vary by industry and sector. Some common examples include:
Ingredients purchased by cafes and restaurants
Items of clothing sold by retailers
Raw materials purchased by manufacturers
Bottles of wine and beer purchased by pubs and bars
What’s the difference between trade payables and accounts payable?
The terms “trade payables” and “accounts payable” are often used interchangeably. However, while both pertain to everyday operational expenses, they are subtly different. All trade payables are accounts payable, but not all accounts payable are trade payables. Trade receivables pertain specifically to inventory. If it goes towards providing the product or service you extend to your customers, it’s likely classed as trade payable.
For instance, if you run a restaurant the food and drink you buy to be prepared and sold to the customer is classed as trade payable. However, the company you use to design your website is classed as accounts payable.
What are trade receivables?
Trade receivables are essentially the opposite of trade payables. Your trade receivable is the total amount receivable for the products or services that you provide. These are logged as an asset on your balance sheet.
Like trade payables, they are logged only when sales are made on credit, i.e. the goods have been delivered but payment has not yet been made in full.
The importance of terms of payment
It’s extremely important to establish fair and realistic terms of payment with your vendors and suppliers. Otherwise, you may have to settle accounts for trade payables before you’ve acquired the income from trade receivables. This could create negative cash flow. Thus, your company may need to take on short-term, high-interest debts such as bridging loans to remain operational.
We Can Help
If you’re interested in finding out more about trade payables and how to account for them, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.