Trade Payables: Definition, Benefits & Examples

Sometimes lumped in with accounts payable, trade payables have a slightly different purpose and definition. When you run a business, no matter what the business is, there are numerous vendor relationships that you’ll forge in an effort to succeed in your industry. 

Some of those vendors will address business needs like website design and managed IT services. The expenses incurred from these vendors are categorized as accounts payable. Others will provide raw materials to you to make your inventory; when these vendors send an invoice, your accounting team will process them as trade payables. 

This setup helps you keep more cash on hand and have a better cash flow position than you would if you had to pay for all the supplies upfront. Maintaining a solid cash flow will help protect your business from any lulls or unforeseen events, but it will also help you make better business investments.

Essentially a subcategory of accounts payable, trade payables give you the chance to create your product, market it, and bring in revenue before incurring the costs associated with those supplies. If you’re not using trade payables effectively, you could be holding your business back from reaching the next level.

What are Trade Payables?

Trade payables represent short-term liabilities/debts arising when businesses acquire products or services from external vendors or suppliers to fulfill customer orders. It encompasses expenses related to third-party transactions. Notably, inventory paid in cash doesn't qualify as a trade payable documented in financial statements.

If there’s a part that’s going into making the bike that you’re going to sell, that’s a trade payable. If there’s a water solution that goes inside the snow globes you make, that’s a trade payable.

All rectangles are squares, but not all squares are rectangles, right? Trade payables and accounts payable have the same relationship. All trade payables are accounts payables but not all accounts payables are trade payables. These short-term debt arrangements made with vendors generally require periodic payments and are not easily handed out to new clients. Most of the time, it takes a solid history of working together before a vendor will offer any lines of credit, including trade receivables, to their customers.

Trade Payables & Procurement 

Trades payable are typically managed by the procurement team within a company. As part of the procurement process, this team will source the right products, select a vendor, work with the vendor to finalize contracts, and track the incoming products to ensure everything is received as ordered. They will also monitor the quality of the supplies, doing their best to make sure the quality of your finished goods meets customer expectations.

When it’s time to make a payment to a vendor that you have a trade payables agreement with, the accounts payable team will partner with procurement to check that everything was received and is ready to be paid. If you and your vendors agree, there may be a netting process in place. With AP automation software, paying vendors or suppliers throughout the year can be done automatically, including the payment approval process and the three-way matching steps. End-to-end, automation tools can remove some of the time-consuming tasks from the accounts payable and procurement teams.

Trade Payables vs. Accounts Payable

We’ve discussed it a bit above, but accounts payables, trade payables, accounts receivables, and trade receivables are not the same thing. 

Accounts payables and accounts receivables refer to all credit relationships of a business. No matter what the vendor or receiver is buying or selling, accounts payables and accounts receivables encompass those transactions.

Trade payables and trade receivables are subcategories of the parents above. Trade payables are a type of accounts payable, used only for inventory-related business expenses. If you need a product to make your product or enhance your service, it’s a trade payable. All other credit expenses are accounts payables.  

If you’re a smoothie shop, the raw materials you need are fruits, yogurt, cups, straws, lids, and other ingredients. All of these items play an essential role in getting your product to your customers, and because of that, they are categorized as trade payables. 

Benefits of Managing Trade Payables

Well-managed trade payables accounts are at the core of business success. It may seem like that’s an oversimplified take, but in reality, these lines of credit can make a world of difference for your business. 

The main benefits associated with trade payables are:

Cash Flow

The main perk of accounts payable, trade payables more specifically, is the increased cash flow levels that come along with it. Since cash flow measures both incoming and outgoing cash, it’s best to have more cash coming in than you have going out. Since trade payables are categorized as liabilities, they do not detract from your cash accounts more than a few times per year. This dynamic allows you to keep an extra cushion of cash, protecting your business from risks and empowering your leadership team to make strategic investments throughout the year.

Liquidity Boost

A business’s liquidity refers to its ability to access liquid assets, such as cash, to cover short-term expenses. With the increased cash flow referenced above, your business is also more liquid. Not only does this benefit you in the way of financial protection, but it also helps investors view your business in a more positive light. If your liquidity ratios are favorable, it might be easier to get capital injections when needed.

Enhanced Vendor Relationships

In business, there’s nothing more important than relationships. So now that you know the answer to, “What are trade payables?” it’s important that you understand how they improve your vendor relationships. Anytime a vendor is willing to extend a customer a line of credit, it signifies that they trust that customer to pay them back in a timely manner. That image of your business will permeate the industry; if one vendor trusts you, many others will, too.

Better Expense Tracking

Breaking down expense tracking into a more specific structure can make it a lot easier to chase down incorrect charges or missing journal entries. Having a specific AP trade account gives your finance team enough visibility to assess vendor relationships, determine whether the pricing structure is correct, and much more. Trades payable monitoring is just the tip of the iceberg; you can create a number of expense subcategories to keep this initiative going.

Challenges of Managing Trade Payables

Despite all the good that comes with trades payable, there are a few accounting risks that come with this account. AP trade is complex, and with new vendors coming into the mix constantly, it can be hard to keep everything organized. If you consider the risks ahead of time, you can use processes and advanced technologies to mitigate them.

Mis-categorization

If you have a new person on the AP team, they might not have a solid understanding of the trade payable definition. This could result in incorrectly categorizing new vendors during the supplier onboarding process. For instance, if your managed IT provider is categorized under trades payable, the AP team might face some headaches down the line.

Fraud

We all want every person in the business world to be a good person, but unfortunately, that’s not always the case. Internal employees can commit fraud by creating fake supplier accounts, “receiving” fake items, and paying invoices that aren’t real, often routing them to their own accounts. Externally, untrustworthy suppliers could send invoices or charge for products that were never sent. Using advanced AP software today can automate much of this process, helping protect your business from fraud.

Late Payments

Missed and late payments happen sometimes, but they are one of the fastest ways to destroy a healthy vendor relationship. If you have a bad AP trade process in place or have too many touchpoints where human error can stop a payment, late payments could become an issue.

AP Automation’s Role in Trade Payables

Trades payable are an important part of doing business; they enable your company to design and produce whatever products you bring to the market. Without trade payables, you might have to pay for all the necessary supplies up front, putting your business finances into a precarious position. To help mitigate any of the potential risks that come with AP trade, consider implementing a solution like Nanonets that can monitor invoices, send payments, and even take care of three-way matching to make sure the items were received.

With software solutions, managing trade payables becomes streamlined and efficient, but that’s not all these solutions can do. They can help predict revenue numbers, automate financial reporting, and reduce the amount of time it takes to do business. Equipped with the right tools, your AP team won’t just be effective; it’ll be unstoppable.