Trade Receivables & Trade Payables Budgets

Most sales and purchases are on credit, so cash is received from customers and paid to suppliers later than the sale/purchase is made. The trade receivables budget and trade payables budget work out when that cash actually moves, which is essential for the cash budget.

• The trade receivables budget schedules the cash collected from customers, based on the credit period they take.
• The trade payables budget schedules the cash paid to suppliers, based on the credit period the business takes.

Both are essentially control accounts in budget form: they reconcile the opening balance, the credit transactions, the cash flows and the closing balance. Getting the timing right matters because a profitable business can still face a cash shortage if customers pay slowly or suppliers must be paid quickly.

The trade receivables budget reconciles the receivables balance:

$\text{Closing receivables} = \text{Opening receivables} + \text{Credit sales} - \text{Cash received} - \text{Discounts allowed} - \text{Irrecoverable debts}$

The key is the cash received, which depends on the credit period. Example. If customers pay one month after sale, then January's cash = December's credit sales. So in a month-by-month schedule, you lag the cash receipts by the credit period.

Example. Opening receivables $40,000; credit sales for the period $200,000; closing receivables $50,000 → cash received = 40,000 + 200,000 − 50,000 = $190,000.

Allow for:

• discounts allowed to customers who pay promptly (reduce the cash and clear the debt);
• irrecoverable debts written off (clear the debt, no cash). The cash received figure is what flows into the cash budget.

The trade payables budget mirrors the receivables budget, for suppliers:

$\text{Closing payables} = \text{Opening payables} + \text{Credit purchases} - \text{Cash paid} - \text{Discounts received}$

The cash paid depends on the credit period the business takes from suppliers. Example. If the business pays suppliers two months after purchase, then March's payment = January's credit purchases.

Example. Opening payables $25,000; credit purchases $120,000; closing payables $30,000 → cash paid = 25,000 + 120,000 − 30,000 = $115,000.

Allow for:

• discounts received from suppliers for prompt payment (reduce the cash and clear the debt).

The cash paid is what flows into the cash budget as a payment. So receivables → cash in, payables → cash out, both timed by their credit periods. Taking longer credit from suppliers (more payables days) delays cash out and helps liquidity.

These budgets connect to the other statements:

• the cash received (receivables) is a receipt in the cash budget;
• the cash paid (payables) is a payment in the cash budget;
• the closing receivables is a current asset in the budgeted statement of financial position;
• the closing payables is a current liability in the budgeted SOFP.

So the receivables and payables budgets are the bridge between the sales/purchases budgets (which give the credit transactions) and the cash budget (which needs the timing of the cash). They also help management manage working capital: collecting receivables faster (or offering prompt-payment discounts) speeds up cash in, while taking longer to pay suppliers delays cash out — both easing liquidity, though within the limits of good supplier relationships and the cost of discounts.