What are trade payables? Trade payables are the obligations to pay for purchasing goods and services on credit from third parties, suppliers, or vendors.
Every company has to purchase raw materials for manufacturing the goods and delivering the final goods to their customers. In the entire process, the company buys supplies from the suppliers and pays for the same in cash or credit. Sometimes, you can avoid making if you purchase the inventory or supplies in bulk or a heavy amount of supplies. And in this scenario, the purchases are considered credit purchases and included in the trade payables.
In simple terms, every credit purchase a company makes is the trade payables. We can classify trade payables in two ways;
Trade payables into the short term –
Trade payables can be classified as current liabilities if the credit period is for one year or less. Examples of current liabilities include; short-term debt, accounts payable, notes payable, income tax owed, dividends, etc.
Trade payables into long-term –
Trade payables can be classified as non-current liabilities if the has not owed money within one year. Examples of non-current liabilities include; long-term loans, long-term ease, deferred tax, bonds payable, pension benefit obligations, etc.
Trade payables are the combination of trade creditors and bills payable. So, now let us discuss who are trade creditors and what bills are payable.
Trade creditors –
Trade creditors refer to the suppliers that provide goods or services to the company on the credit terms. It means you haven’t yet paid the suppliers for purchasing the goods or services. Therefore, trade creditors are the suppliers, customers, vendors, or third parties to whom the company owes the money. Examples of trade creditors may include; the clothing industry purchases materials and items through retailers on credit.
Bills payable –
Bills payable refer to the money the company borrows from the banks for a short term. It also refers to the money owed for the goods or services purchased on credit under the bills of exchange. And the company owes this money later to the bank. Examples of bills payable may include; a monthly telephone bill, electricity bill, repairing bill, etc.
What are the significant benefits of trade payables? Following are some of the significant benefits of trade payables that will help you to understand why the most company chooses trade payables:
It results in more cash flow –
Suppose a company uses the trade payables method to purchase the raw materials or supplies on credit from the suppliers or vendors. In that case, it will help maintain its cash flow for a specific period of time.
Help to build better relationships with suppliers –
If you purchase the inventory or other related items from the supplier or vendors, make sure you pay the amount on time. It will build trust, which is very important in every business, and help to build better relationships with the suppliers or vendors. You can also consider having a utility bill management can also help you ensure that your recurring utility bills are being managed efficiently and paid on time.
So, these are the two significant benefits a company can get if using trade payables to make credit purchases from the suppliers.