What Are Trade Receivables and How Do I Manage Them?
Mark Harris
Relationship Manager · Nov 24, 2024 · 7 min read
Trade receivables are amounts owed to your business by customers for goods delivered or services performed, where payment has not yet been received. They appear on your balance sheet as a current asset, representing money you are entitled to collect within your standard payment terms. For most B2B businesses, trade receivables are one of the largest items on the balance sheet, and how well you manage them directly determines your cash flow position.
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Trade receivables on the balance sheet
When you raise an invoice for goods delivered or services completed, you record a trade receivable (also called a debtor) on your balance sheet. The receivable represents the right to receive cash in the future. It is classified as a current asset because it is expected to convert to cash within twelve months under normal trading conditions. As customers pay, the receivable is reduced and cash increases, with no effect on the profit and loss account (which recorded the revenue when the invoice was raised, not when it was paid).
Gross trade receivables reflect the total amount owed before any allowance for doubtful debts. Net trade receivables are gross receivables minus an allowance for debts the business considers unlikely to be collected (typically calculated as a percentage of the total based on the age of the debt and historical bad debt experience). The allowance for doubtful debts is a judgement-based provision that affects the profit and loss account and reduces the asset value on the balance sheet.
Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) measures how long, on average, it takes your business to collect payment after a sale is made. It is calculated as: (trade receivables divided by annual revenue) multiplied by 365. A business with £200,000 of trade receivables and £1,000,000 of annual revenue has a DSO of 73 days. This means, on average, it takes 73 days from raising an invoice to receiving payment.
DSO is one of the most important operational metrics for B2B businesses. A rising DSO signals that customers are taking longer to pay, which increases the capital tied up in receivables and creates cash flow pressure. A falling DSO signals improvement in collections. Industry benchmarks vary significantly: professional services typically see DSOs of 30 to 45 days, while construction can run to 60 to 90 days or beyond. Comparing your DSO to your stated payment terms reveals how much of the delay is structural versus customer behaviour.
"Trade receivables are not just an accounting entry. They represent real cash you have earned but not yet collected. The faster you convert them to cash, the stronger your working capital position."
- Mark Harris, Relationship Manager
How invoice finance unlocks trade receivables
Invoice finance is a funding facility that allows businesses to borrow against the value of their trade receivables without waiting for customers to pay. An invoice finance provider advances up to 85% to 90% of the face value of eligible invoices within 24 hours of the invoice being raised. When the customer pays, the provider releases the remaining balance (the 'reserve') minus their fees. The business effectively converts a 60-day receivable into same-day cash.
There are two main structures. Factoring (also called disclosed invoice finance) involves the finance provider managing the collections process directly. Customers are notified that invoices are being managed by a third party and pay the provider directly. Invoice discounting (confidential invoice finance) keeps collections in-house: the business continues to chase and collect its own invoices, and the customer is never aware of the facility. Larger businesses with strong credit control functions typically use invoice discounting; smaller businesses often benefit from the credit control support that factoring provides.
Managing trade receivables effectively
Effective receivables management combines three elements: strong credit checking before you extend credit to new customers, clear payment terms communicated at the point of sale and on every invoice, and a consistent collections process for overdue accounts. Businesses that invest in all three consistently outperform those that treat credit control as an afterthought.
Technology helps significantly. Accounting platforms such as Xero and QuickBooks automate invoice sending, payment reminders, and debtor reporting. Open banking tools give you real-time visibility of which invoices have been paid before the bank statement clears. Credit checking services (such as Creditsafe or Experian Business) help you set appropriate credit limits for new and existing customers based on their financial health.
Frequently Asked Questions
What is the difference between trade receivables and accounts receivable?
The two terms are used interchangeably in most UK business contexts. Accounts receivable is the broader term used in accounting; trade receivables specifically refers to receivables arising from the core trading activity of the business (selling goods or services). Both appear on the balance sheet as current assets.
Can I use trade receivables as security for a loan?
Yes. This is exactly what invoice finance does: it uses trade receivables as the security for a revolving credit facility. Asset-based lending facilities can also incorporate receivables as one component of a wider security package alongside stock, plant, and property.
The bottom line
If a large portion of your business capital is tied up in unpaid invoices, invoice finance could release it within 24 hours. Spark Finance works with specialist invoice finance lenders across the market. Start at apply.sparkfinance.co.uk.
Check your eligibilityAbout the author
Mark Harris
Relationship Manager
Mark is a Relationship Manager at Spark Finance with a strong track record in merchant cash advances and short-term business loans. He specialises in revenue-based finance for hospitality, retail, and leisure businesses, helping operators access flexible funding tied to card sales volumes.
