Managing trade receivables well is a critical challenge for UAE businesses today. In 2024, the UAE’s non-oil foreign trade exceeded AED 2 trillion, highlighting vast volumes of credit sales driving the economy.
For companies, these outstanding payments directly impact cash flow and working capital. Delays in collections can disrupt operations and growth plans.
With rising VAT regulations and real-time e-invoicing mandates set to impact 78% of UAE businesses by 2025, efficient receivables management is more crucial than ever to avoid fines and improve financial agility.
This article explores trade receivables' role in your business, key metrics to track them, and tips to optimise collections while staying compliant in the UAE market.
Key Takeaways:
- Trade receivables are current assets expected to be collected usually within 30-90 days.
- Key metrics such as Days Sales Outstanding (DSO) and receivables turnover ratio are vital for monitoring credit risk and payment efficiency.
- Automating billing, collections, and using AI-driven platforms can reduce invoice processing time by up to 70%, accelerating cash inflows and reducing errors.
- Effective receivables management balances offering credit to promote sales with controlling bad debts and maintaining liquidity.
What is Trade Receivable?
Trade receivables are classified as current assets on a company’s balance sheet because they represent amounts due from customers that are expected to be collected within the normal operating cycle of the business, usually within one year. Most companies use standard invoice payment terms of between 30 and 90 days, meaning these receivables typically convert to cash within that timeframe.
For example, if your manufacturing company sells goods to a client for AED 183,500 on 30-day payment terms, you record that amount as a trade receivable at the time of sale.
When the customer pays within the agreed term, you debit your cash account and credit the trade receivables account, reflecting the collection of outstanding payment. This process ensures accurate tracking of sales revenue and cash flow.
How to Calculate Trade Receivables?
Accurately calculating trade receivables enables you to maintain clear financial records, optimise cash flow, and ensure compliance with accounting standards. Here are essential formulas and practices to monitor your receivables health:
1. Gross Trade Receivables
This figure shows the total amount your business expects to receive from customers before accounting for doubtful debts.
Gross Trade Receivables = Opening Receivables + Credit Sales − Collections
Example: If you start a month with AED 100,000 in receivables, make AED 200,000 in credit sales, and collect AED 220,000, your gross trade receivables amount to AED 80,000.
2. Net Trade Receivables
Since some amounts may never be collected, it is vital to subtract the Allowance for Doubtful Accounts, an estimate of receivables unlikely to be recovered.
Net Trade Receivables = Gross Trade Receivables − Allowance for Doubtful Accounts
This ensures your reported assets reflect a realistic value.
3. Trade Receivables Turnover Ratio
This ratio measures how efficiently you collect receivables over a period, informing liquidity and credit policy effectiveness.
Turnover Ratio = Net Credit Sales / Average Trade Receivables
A ratio above 10 typically indicates timely collections; a lower ratio might signal collection issues or relaxed credit terms.
4. Days Sales Outstanding (DSO)
DSO estimates the average collection period for invoices, with direct implications on cash flow.
DSO = 365 / Receivables Turnover Ratio
Lower DSO means faster cash inflows, critical for meeting VAT reporting deadlines and operational commitments in fast-paced UAE markets.
Mastering these calculations provides a strong foundation to control credit risks and enhance financial stability for UAE businesses across industries such as retail, real estate, and healthcare.
Also Read: How to Solve Cash Flow Issues in Business: Practical Strategies in UAE Businesses
Importance of Trade Receivables
Understanding trade receivables is critical for any business operating on credit terms. They provide key benefits and insights, including:
- Revenue Recognition: Trade receivables represent earned revenue not yet received in cash, helping businesses accurately track income and overall financial health.
- Monitoring Liquidity: As current assets, trade receivables indicate the company’s short-term liquidity position and play a central role in managing working capital effectively.
- Cash Flow Management: Timely collection of receivables ensures steady cash flow, enabling you to pay suppliers, employees, and invest in growth without financial strain.
- Credit Risk Control: Monitoring receivables helps minimize bad debt risk by identifying late payers early and adjusting credit policies accordingly.
- Business Growth: Offering credit can encourage larger purchases and help expand market share, but it requires disciplined receivables management to avoid cash flow disruptions.
Accounts Receivable vs Trade Receivable: What’s the Difference?
Understanding the difference between accounts receivable and trade receivable is key to precise financial planning and cash flow management. Here’s a detailed comparison to guide you:
Also Read: What are Accounts Payable and Accounts Receivable?
How to Optimise Trade Receivables Management?
Optimising trade receivables management is key to improving cash flow and reducing financial risk. Here are proven strategies to help you get paid faster and maintain healthy working capital:
1. Automate Billing and Payments
Use electronic invoicing and integrated payment systems to eliminate delays associated with paper processes. Clients can pay directly from invoices, and payments are automatically recorded, enhancing accuracy and speeding collections.
2. Set Clear Credit Policies
Establish standard credit terms and ensure your sales and finance teams consistently apply them. Assess customer creditworthiness before extending terms and define approval authority clearly to minimise risk.
3. Offer Early Payment Discounts
Incentivise prompt payments by offering discounts, such as “2% off if paid within 10 days.” This encourages customers to prioritise your invoices and accelerates cash inflows.
4. Streamline Dispute Resolution
Develop and communicate a defined process for handling invoice disputes quickly. Faster resolution improves customer satisfaction and reduces payment delays.
5. Track Key Metrics (KPIs)
Monitor Days Sales Outstanding (DSO), receivable turnover, and ageing reports regularly. These indicators highlight bottlenecks, enabling proactive collection tactics and credit management.
6. Maintain Accurate Customer Data
Regularly update contact and billing information to avoid lost or delayed invoices. Ensuring data accuracy reduces disputes and supports timely follow-ups.
7. Engage Cross-Functional Teams
Collaborate closely with sales, finance, and customer service teams to ensure transparency and coordinated collection efforts. Holistic involvement helps maintain strong client relationships while improving cash collections.
8. Adopt Technology Solutions
Look for AI-powered receivables management platforms that automate receipt digitisation and matching, deliver real-time dashboards to flag late payments, and maintain audit-ready records automatically.
AI automation can reduce invoice processing time by up to 70%, significantly boosting operational efficiency and speeding up cash flow.
Implementing these best practices results in enhanced cash flow stability, lower bad debt risk, and stronger control over your company’s finances.
How Alaan Helps Optimise Trade Receivables Management
Alaan is a comprehensive AI-powered spend management platform tailor-made for businesses across the Middle East, designed to automate and streamline financial workflows with precision. Here’s how we support trade receivables and expense management:
Unlimited Smart Corporate Cards
Instantly issue virtual and physical corporate cards with granular spending limits, merchant restrictions, and approval workflows. This real-time control prevents unauthorized spending and provides immediate visibility into employee expenses, helping businesses reduce unanticipated liabilities impacting receivables.
AI-Powered Expense Automation
The platform automatically captures all key receipt details—including VAT, TRN, and vendor information—via AI-driven digitization, eliminating manual entry errors. Automated matching of receipts to card transactions accelerates reconciliation, crucial for timely trade receivables management.
Real-Time Spend Tracking and Analytics
Finance teams get centralized dashboards offering detailed insights by user, vendor, department, and more. This holistic visibility enables proactive identification of potential credit risks and overdue payments, improving collection strategies.
Seamless Accounting Integrations
Alaan integrates effortlessly with popular ERP and accounting systems like Xero, QuickBooks, and Oracle NetSuite. This seamless connection automates data syncing, speeds up month-end closes, and ensures VAT-compliant, audit-ready financial reporting.
Custom Approval Flows and Spend Controls
Tailored approval processes and built-in spend controls enable businesses to enforce policies strictly, reducing the risks associated with delayed or disputed payments.
With over 1,000 businesses across the UAE and MENA region, including leading enterprises such as G42 and Careem, Alaan empowers finance teams to cut manual processes, enhance cash flow visibility, and strengthen working capital management. The result is faster trade receivables cycles and better financial health overall.
Conclusion
Effective trade receivables management is essential to a company’s liquidity and growth. By monitoring key metrics and leveraging automation, businesses can reduce payment delays, lower bad debts, and improve cash flow predictability.
AI-powered platforms streamline invoice processing, expense tracking, and financial reporting, freeing up finance teams to focus on strategic priorities. These tools also enhance visibility into outstanding payments, helping businesses stay compliant and audit-ready.
Schedule a demo today to see how smart spend and receivables platforms can transform your finance operations.
FAQs
Q1: What are trade receivables?
Trade receivables are amounts customers owe a business for goods or services sold on credit. These receivables are assets that represent future cash inflows and are crucial for managing working capital effectively.
Q2: Why is managing trade receivables important for cash flow?
Effective management of trade receivables ensures the timely collection of payments, which directly impacts a company’s cash flow and ability to meet financial obligations such as payroll, supplier payments, and investments.
Q3: How can businesses reduce the risk of bad debts in trade receivables?
Implementing credit checks, setting clear payment terms, and using automated reminders and collections software helps minimize late payments and defaults, protecting the company’s financial health.
Q4: What role does technology play in trade receivables management?
Automation tools streamline invoice processing, payment tracking, and reconciliation, reducing manual errors, saving time, and providing real-time visibility into outstanding receivables for proactive cash flow management.
Q5: How do trade receivables affect financial reporting?
Trade receivables impact key financial ratios and are integral to accurate revenue recognition and balance sheet presentation, influencing stakeholder decisions and compliance with accounting standards.
Q6: What is the difference between trade receivables and accounts receivable?
Trade receivables specifically arise from credit sales related to core business operations, whereas accounts receivable is a broader term including all amounts owed, such as from loans or other incidental transactions.
