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What are Trade Payables?
Trade payables is the money that a business owes its suppliers for items procured on credit terms. These liabilities arise due to purchases of inventory, materials, utilities, rent etc. made from trade creditors.
A predefined credit period, usually of 30-60 days, is mutually agreed upon. During this time, payment for invoices is not immediately required.
By the end of the payment deadline, the outstanding dues are reflected as trade payables in books until settlement. They represent short-term debts since they have to be settled within one operating cycle of the business.
Trade Payables vs Accounts Payable
There is a subtle difference between trade payable and accounts payable.
| Criteria | Trade Payable | Accounts Payable |
| Scope | Trade payables refer to the amount a company owes its suppliers for purchases directly related to the company’s core operations. | Accounts payables is a broader term that also includes money owed for purchases of products or services not directly related to core business operations. |
| Example | A bakery purchasing flour, sugar, eggs and other raw material on credit will include these purchases as a part of trade payables. | The same bakery purchasing cleaning supplies, office stationery will include these purchases under accounts payable since they are not directly linked to business operations. |
| Settlement | Trade payables are typically settled within 30-60 days. | Accounts payables are also settled within a short-term period, but the payment terms may be more complex and may require tracking and follow-ups. |
Benefits of Trade Payables
Interest-free financing
Purchasing goods or services on credit under a trade payable agreement is an interest-free short-term loan. This helps businesses save working capital for more cash-heavy purchases, improving liquidity and cash flow.
Trade payables relieves businesses of having to make sure cash is available on hand for every purchase – especially small-ticket daily purchases.
Better vendor relationships
Consistently making vendor payments on time builds the business’s reputation and goodwill with vendors. Good relationships can bring a host of benefits to the business, like priority deliveries, high quality products, discounts, and flexible repayment timelines.
For example, in the COVID crisis, when cash flow stagnated and supply chains broke, businesses with good vendor relationships enjoyed better payment terms and repayment windows, giving them the liquidity boost to tide over tough times.
Read more: Credit turnover ratio
Better inventory management
Purchasing supplies on credit helps businesses acquire and maintain inventory without having to set aside cash. This allows for immediate availability of supplies for core business operations – businesses can meet customer demand without having to worry about cash flow.
Risks of Trade Payables
Managing vendors and invoices
Businesses spend a significant amount of time and resources on managing trade payables so that payments can be made on time. Late payments result in fines, strained relationships and even legal action. When invoices and vendors are being managed manually, there is the risk of errors in processing, delays in payment and more.
This is why most businesses today are turning to solutions like RazorpayX to automate all their payables. RazorpayX harnesses the power of automation to manage payments to employees, vendors, refunds to customers and more.
What are Trade Receivables?
Trade receivables refers to the total amount receivable by a business for products or services rendered. They are recorded as a current asset on the business’s Balance Sheet.
FAQs
How does a company calculate trade payables?
Trade payables are calculated by adding all the unpaid and outstanding invoices and bills from suppliers that a company owes as of a certain date. These may include amounts due for goods or services procured within the pre-agreed credit period. Recording them accurately in books is important for financial accounting and management decision-making.
What are some best practices for managing trade payables?
Some key best practices include periodically reviewing payment cycles and vendor credit terms for optimization, automating approval-payment workflows, timely payment within agreed schedules without delays, accurate tracking through ageing reports to avoid overdue, auditing credit histories for negotiation insights, and collaborative information sharing with key suppliers for mutual growth.
