Receivables and Payables Explained for Non-Accountants

A hardware trader we know could tell you, to the rupee, what was in his cash drawer. Ask him how much customers owed him, and he would flip through a ledger book and say, roughly, a lot. Ask how much he owed his suppliers and the answer was the same. He was not careless. Nobody had ever told him these two numbers were worth knowing every week.

They are called receivables and payables, and the idea behind them is simple enough to explain at a tea stall.

The two words, without the jargon

Receivables is money you have earned but not yet collected. You delivered the goods, you raised the invoice, the customer said 'I'll pay next week'. Until that money lands, it is a receivable. It belongs to you, but you cannot spend it.

Payables is the mirror image. You took stock from a supplier, got a purchase bill, and agreed to pay in 30 days. That bill is a payable. You have the goods, and the supplier has a claim on your cash.

Put them side by side and you get a quick picture of your position. Receivables is what is coming in. Payables is what is going out. Cash and bank balance is what you have right now.

Why a sale is not the same as money

This is the part that trips people up. A credit sale shows up in your sales total the day you make it. It does not show up in your bank until the customer pays. If you only watch sales, a month can look wonderful while the account stays thin.

Say you sell goods worth ₹2,00,000 on credit in a week, and customers pay only ₹50,000 of it. Your sales chart looks great. Your receivables just grew by ₹1,50,000. If a supplier bill of that size falls due the same week, you have a problem that no sales chart would have warned you about.

Sales is what you billed. Receivables is what you are still waiting for. Cash is what you can actually use.

A small example with both sides

Take a stationery wholesaler for one month. He bills a school for notebooks, a customer owes him, and the school pays after 45 days. That invoice is a receivable for all 45 days. In the same month he buys paper from a mill on credit. That purchase bill is a payable until he pays it.

1. 1Sale invoice raised for the school: receivable goes up.
2. 2Purchase bill received from the mill: payable goes up.
3. 3School pays: receivable goes down, bank balance goes up.
4. 4He pays the mill: payable goes down, bank balance goes down.

Every credit transaction in your business follows one of these four moves. Once you see that, the ledger stops looking like a mystery.

What to check, and how often

You do not need a monthly accountant visit to keep an eye on this. A weekly look is plenty for most small traders. These are the questions worth asking:

• What is the total I am owed, and which three customers make up most of it?
• Which of those invoices are past their due date?
• What do I owe suppliers, and what falls due in the next two weeks?
• After my bank and cash balance, can I cover those bills?

In Billy, receivables and payables are tracked from your invoices and purchase bills, and they sit on the dashboard next to cash and bank balance, so the whole picture is one screen. If you keep books in a notebook or spreadsheet, the same four questions work. The tool matters less than the habit.

Common mistakes we see

The first is mixing advances with receivables. If a customer pays you in advance, that is not a receivable, it is money you hold for work still to be done. Record it as a payment against the customer, not as a sale.

The second is forgetting to mark a payment received. Money arrives in the bank, nobody updates the invoice, and three weeks later someone calls the customer to ask for money already paid. That is an awkward call, and it is avoidable. Our post on following up on unpaid invoices covers how to keep those conversations civil.

The third is treating payables as 'the supplier will wait'. Sometimes they will. But a supplier who has to chase you tends to shorten your credit terms next time.

Where to go from here

Once these two numbers are familiar, the rest of the books make more sense. Read cash flow for small traders for a weekly routine, and overdue payments and ageing to decide whom to call first. If your supplier side needs more structure, supplier management and payables tracking goes deeper.

And if your business has a quirk that off-the-shelf software does not cover, tell us about it. We build custom software, and we would rather hear the real problem than guess.