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Trade Receivables (Definition, Example) | How it Works? - YouTube
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clicking the bell icon today we have a
topic that is a trade receivables a part
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of balance sheet in the current assets I
trade receivables are like you know your
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customers which have some outstanding
news there have some outstanding use to
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be paid why this is really important for
any business let's learn this if you see
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trade receivables over here that's 4.66 billion over here and
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1.48 it's for Colgate
that's in blue 1.48 and
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Procter & Gamble's to 4 billion so
what exactly is the difference here okay
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let's understand this see Trade Receivables is an accounting entry in the
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balance sheet of so which arises due to
you know selling of the goods and
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services by the entity to its customers
on credit basis so since this is an
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amount which the entity has a legal
claim you know or its customers and also
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the customer is bound to pay same to the
entity it is classified as the current
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assets in the balance sheet of the
entity so the trade receivable and the
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account receivables are used
interchangeably in the industry but
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similar to the account receivable
company also have the non trade
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receivables which arises on account of
the transactions unrelated to the
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regular course of the business okay now
trade receivables on the balance sheet
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and let's talk about that the standard
format of the balance sheet of an
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enterprise let me show you that this is
the standard format of Colgate you know
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you see the asked site on the trade
receivable there is in current assets
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that is cash then there is a receive net
of allowances of 77 and 73 respect to
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then they have inventories other current
assets total current assets and then all
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the tangible path starts so what exactly
this is all about let's discuss now see
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this is generally classified under the
current assets in the balance sheets
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right we'll take an example here to
understand this in a more conceptual map
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let's say there is a company called ABC
corporation in an electrical equipment
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manufacturing company so it has recorded
its sales
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let's say at 100 u.s. billion
dollars of financial ad but let's say
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and 30% of the sales on
credit 30% or sales is uncredited
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to its corporate customers so the trade
receivables accounting entry for the
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transaction is the balance sheet will be
shown something like this the total
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sales or financially FY18 is going to
be how much 100 billion so
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everything will be in terms of billion
then there will be credit sales
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30%
we have account receivables and trade
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receivables that will be let's total
sales as a percentage of sale on
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basically credit and then you have
account receivable and trade
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receivables as 100% 100 here
that is 100 billion into 30%
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right so that that comes down to how
much USD 30 billion dollars so that is
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the amount of the credit sales and as an
account receivable it would be shown in
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the balance in this example the account
receivable recorded is at 30 billion
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dollar in the current asset in the
current assets head in the balance sheet
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now why the trade receivable is a very
you can see a critical aspect I want to
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understand this why exactly this is
critical see I'll try and try to
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demonstrate that why account receivables
are very critical for the liquid it will
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become me in many times it becomes a
very sole reason for the company is
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becoming bankrupt so the liquidity
analysis of the enterprise comprises of
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company short-term financial positions
right and ability to pay its short
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liabilities so one of the most important
metric we look at while analyzing the
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liquidity position with the company is
the cash conversion cycle and cash
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conversion cycle is the you know number
of days which an enterprise takes to
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convert its inventory into cash okay so
it's something like this you have
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inventory over here then you do a sale
so you get trade receivables because
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some won't be receivables some will be
like you know on a credit basis for the
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same trade visible you get cash
here and finally that cash that you need
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to pay to the account Accounts Payable
that is to the suppliers so this is the
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whole chain of the whole cycle you can
see that right so the above this thing
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you know inventory Trade Receivables cash AP it explains in a way it's the
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inventory cycle so for an enterprise it
starts with the purchase of the
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inventory from the AP right which may be
on cash or credit purchase the
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enterprise converts that into finished
goods okay and and makes sales out of it
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the sale are made for cash and credit
the sales made on the credit is recorded
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as trade receivables so the cash
conversion cycle is the total number of
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the days it takes for an enterprise to
convert it its inventory to finish goods
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and then to make a final sales with
trade receivables and the total number
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of days it takes the enterprise to
convert its inventory into final sales
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and realization of the cash so the
formula for the cash conversion cycle
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CCC it's triple C days
receivable plus days of inventory less
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Days payable outstanding so from the
above formula it is evident you know
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that the company with a significantly
higher proportion of trade receivable
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will have higher days of receivables and
therefore higher cash conversion cycle
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what you need to know that of course you
know the CCC Triple C depends on the
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other two factors also which are days of
inventory outstanding and days people
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outstanding however here to explain the
impact with the receivables we have kept
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other two parameters in different so you
can say the higher cash conversion cycle
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for an enterprise may lead to a
significant increase in the working
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capital and once the trade receivables
have level the reaches the alarming
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level it may create a serious trouble
for the enterprise creating you know a
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short term liquidity issues which
company will not be able to fund its
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short term liabilities which may be
further lead to suspending operations of
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the company so this this can lead this
can happen absolutely happen now trade
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receivable as an important part of the
working capital loan assess so
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company avails the working capital that
WC loans to meet its short of
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requirement for you know day-to-day
operations so the assessment for the
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amount of the working capital you know
it limit it limits is limit is carried
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out by the lenders are taking into
account all the current assets of the
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company and since the receivables make
the important and considerable part of
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the total current assets and company it
is critical for the lenders to access
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the level off for trade receivables as
well you know all the quality of the
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receivables to approve working capital
limits for the company now let me run
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you through the trade receivables
analysis part and interpretation part
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let me let me run you through that see
the liquidity analysis and
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interpretation for the level of the
trade receivables should always be
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looked in the context of some specific
industry okay now there are certain
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industry which operates in an
environment with you know a high level
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of receivables so a typical example of
same is like you know electricity what
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we call as generation companies
operating in India where receivables
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level are very high and days
receivables for generation companies are
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varies between as low as you know 1
month to as high as closely to 9
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months okay so on the other hand there
are companies which operate which work
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with virtually very less on no trade
receivables so companies are operating
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and roll road projects developer and
operator have very fewer accounts
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receivables as the revenue is toll
collection from the computers or
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commuters on the road and they collect
the toll from the commuters as when they
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pass by the toll plaza so for a
meaningful analysis one should look at
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the the trade receivables levels of the
top 4 or 5 companies in a respect
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to industry and if your target company
has you know let's say a higher
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receivable other than the 4 companies
in the same industry when the company is
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doing something wrong either in the term
of the business model or the client or
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the customers or targeting or incentive
in terms of the credit sales so to
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conclude one can safely assume that
lower the trade receivable levels and
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days receivables is better the
liquidity position so that's it for this
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