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More commonly known as accounts payable, trade payables are debts owed to vendors or suppliers for any products purchased from those providers. Payables of this type include debt obligations that are expected to be settled in full within ninety days after the provider issues an invoice for the goods or services. Depending on the nature of the business operation, trade payables may also include items that may be paid off incrementally over a twelve-month period or longer. There is some difference of opinion on whether any debt obligation over twelve months should be classified as trade payables, or if the obligation should be referred to as a long-term payable.
For many businesses, the main focus of trade payables is on payments for services rendered that are due on a monthly basis. Each vendor account with an open balance is accounted for in the payables section of the company’s account records. These vendor accounts do not accrue any type of interest, which means they are classed as non-interest bearing accounts. Typically, the idea is to retire the balance within these accounts every billing cycle, making it possible to avoid the application of any interest to that outstanding balance by the vendor. For this reason, accountants tend to schedule payments on any trade payables so they are tendered to the vendors on or before the 30th calendar day after the invoice date associated with the debt.
Another common strategy with the management of trade payables requires that accounting personnel consider the rate of interest that each vendor applies to an outstanding balance after thirty days. This is very helpful when the cash flow does not allow for retiring all invoices due before the thirty-day mark is reached. Here, the goal is to determine which obligations can be delayed a week or so and incur the lowest amount of additional interest charges. This approach is often helpful in keeping costs as low as possible when a business undergoes a seasonal downturn or a client experiences some problems and must delay payment to the business.
This efficient management of trade payables can easily save a considerable amount of money over the course of a year. By making sure that debts are paid according to terms, net profits are increased slightly and the business is able to funnel those funds into activities such as improving marketing efforts, upgrading production equipment, or even diverting funds into research and development efforts. In the long run, this responsible management of trade payables benefits everyone associated with the business, including the customers who are able to take those timely payments and use them to benefit their own business enterprises.
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