What are trade debtors?

Trade debtors, meaning a customer who owes you money for goods or services you've already delivered, are in debt, until they pay their invoices.

The trade debtors in a balance sheet refer to the sum of a customer’s unpaid invoices at a given time. These are current assets, as you expect to collect them by their due date.

This trade debtor's total will include VAT if your business is registered to pay it.

For example, you issued an invoice to a customer for £1,000 at the start of the month. Then, a week later they order a further £500 worth of goods. At the month’s end, your balance sheet will show a trade debtor figure of £1,500 for this customer.

You may also hear the term ‘loan debtors’. This is similar to trade debtors but involves lent money rather than the purchase of products or services.

Your trade debtors are customers who are in debt to you, whereas trade creditors are businesses or individuals to whom you are in debt.

Trade creditors in your balance sheet are accounts payable, sometimes called trade payables, and are an important part of your business’ cash flow management as they can help you maintain financial health. Other types of creditors could include financial institutions, such as banks, or service providers, like utility companies.

If a customer doesn't pay on time, UK law gives you the right to charge statutory interest on the overdue amount. If you’d like to know how that works, read our guide to payment terms.

How well you manage your own trade debtors also matters beyond day-to-day cash flow. Lenders and credit providers look at your receivables position when assessing your business for borrowing, so you should keep this under control to support your own creditworthiness, not just your immediate cash position.

Our guide to  assessing and reducing customer default risk explains how to catch a slow-paying debtor before they become a bigger problem.

People often use "trade debtor" and "trade receivable" interchangeably, and in everyday conversation, that's usually fine. But there is a real distinction between the two.

• A trade debtor is the customer or the business that owes you money.
• A trade receivable is the money itself, so the specific amount recorded against that customer on your balance sheet.

So, you have trade debtors, plural, one for each customer who owes you. Against each one sits a trade receivable, which is the actual figure they owe. Add every trade receivable together, across all your trade debtors, and you get your total receivables balance, which is where our accounts receivable guide takes over.

To understand how quickly your business gets paid, use this formula to calculate your debtor days: divide your receivables by your annual net sales, then multiply by 365.

For example, if you have £30,000 yet to be paid, but have made £320,000 in the past year, calculate:

(30,000/320,000) x 365 = 34.22 trade debtor days

This means, on average, it’s taken just over 34 days for your invoices to be paid.

What counts as a "good" number varies by business, but a rising figure is usually a sign of cash flow pressure building, and a falling one suggests your collections are getting more efficient.

The same figures are sometimes expressed as a ratio instead (the trade debtors ratio), instead of a few days, although it's built from exactly the same calculation. This same calculation is also sometimes called Days Sales Outstanding, or DSO; the two terms describing the same metric. If you want to know what a healthy figure looks like for your industry and how to bring yours down, that's exactly what our DSO guide explains.

If you want to manage your business’ financial health well, you must understand your trade debtors as well as what you owe your own creditors.

It’s a balancing act. Too many debtors and your cash flow suffers. Too many creditors and your business comes under strain from the other direction. To get this right, you must have a steady flow of cash through the business, less bad debt  written off, and more funds free to reinvest in growth. Learn more about how to build this into a repeatable process in our guide to credit control.

And, if you’d like to go further, take a look at our piece on managing your business' cash flow.

Most trade debtors clear their invoices on time. But not all of them do, which is why you should protect your business before a slow-paying customer starts affecting your cash flow. If you're already chasing a late payment, our guide to overdue invoices will give you advice on what to do next.

A policy with us covers your receivables due within 12 months, so a customer's late payment or default doesn't become your cash flow problem. We help you avoid bad debt in the first place and compensate you if it happens anyway.

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