- Trade Receivables are Risky Assets: They are essential for sales but expose your business to risks like default, concentration, and operational errors, which can impact your working capital.
- Measurement is Key: Use metrics like Days Sales Outstanding (DSO), Receivables Turnover Ratio, and Collection Effectiveness Index (CEI) to monitor the health of your receivables.
- Proactive Management Reduces Risk: A strong credit policy, diligent customer assessment, and diversification are fundamental management strategies.
- TCI Provides Ultimate Protection: Trade Credit Insurance (TCI) is a strategic tool that protects the value of your trade receivables from the risk of customer non-payment, securing your cash flow.
Managing Trade Receivables: A B2B Guide to Risk, Metrics & Protection
Updated on June 30, 2025
Extending credit to customers is a fundamental driver of B2B sales. This practice creates trade receivables—the money owed to your business for goods or services delivered. While these receivables are a vital asset on your balance sheet, they also represent a significant risk to your cash flow and profitability.
Effective management of your trade receivables, also known as accounts receivable (A/R), is crucial. It involves not just collecting payments, but also understanding, measuring, and mitigating the inherent risks of non-payment. This guide provides a framework for managing your A/R risk, from key metrics to strategic protection.
Summary
Key Takeaways
What are Trade Receivables and Why Are They Risky?
Trade receivables (or accounts receivable) represent the balance of money due to your firm for goods or services delivered or used but not yet paid for by customers. While they are recorded as a current asset, their true value is conditional on your customer's ability and willingness to pay.
The primary risks associated with trade receivables include:
- Credit Default Risk: The risk that a customer will not pay their invoice at all, often due to insolvency.
- Late Payment Risk: The risk that a customer pays significantly after the due date, straining your cash flow and working capital.
- Concentration Risk: The risk associated with having a few large customers represent the majority of your receivables. A default by a single major customer could be catastrophic.
- Operational Risks: Internal risks like disorganized record-keeping, unenforced accounting cutoffs, or invoicing errors can lead to overstated or understated revenue and disputes.
How to Measure and Monitor Your Trade Receivables Health
To manage risk, you must first measure it. Regularly tracking these key performance indicators (KPIs) will give you a clear picture of your A/R health.
- Days Sales Outstanding (DSO): This shows the average number of days it takes to collect payment after a sale. A lower DSO is better. A healthy DSO typically does not exceed your payment terms by more than 50% (e.g., a 45-day DSO on 30-day terms). Calculation: (Average A/R ÷ Total Credit Sales) x Number of Days
- Best Possible DSO: This metric calculates DSO using only your current (not overdue) receivables. The closer your DSO is to your Best Possible DSO, the more efficient your collections are. Calculation: (Current A/R ÷ Total Credit Sales) x Number of Days
- Average Days Delinquent (ADD): This metric tells you, on average, how many days late your overdue invoices are. It provides a clear, at-a-glance look at the effectiveness of your collections process. The lower the ADD, the better. Calculation: DSO – Best Possible DSO
- Receivables Turnover Ratio: This shows how many times per period (usually a year) your company collects its average accounts receivable. A higher ratio indicates efficient credit and collections management. Calculation: Net Credit Sales ÷ Average Accounts Receivable
- Collection Effectiveness Index (CEI): This measures your company's ability to collect receivables during a specific period. It compares the amount collected to the total amount that was available to be collected. A CEI closer to 100% is ideal. Calculation: [(Beginning A/R + Monthly Credit Sales) – Ending Total A/R] ÷ [(Beginning A/R + Monthly Credit Sales) – Ending Current A/R] x 100
Strategies for Managing Trade Receivable Risk
Once you are measuring your A/R health, you can implement strategies to manage and mitigate the identified risks.
1. Establish a Strong Credit Control Policy
This is your first line of defense. Your policy should fully stipulate your credit terms, the amount of credit you are willing to extend, and the process for handling late payments. Before extending credit, research each prospect’s creditworthiness to understand their payment history and financial stability.
2. Diversify Your Customer Base
Actively work to reduce customer concentration risk. By strategically focusing sales efforts on different business segments, industries, or geographic regions, you can ensure that a single customer's default won't jeopardize your entire business.
3. Maintain Rigorous Systems and Standards
Implement a workable system for managing accounts receivable, including proper segregation of duties to prevent operational errors or fraud. Ensure your invoicing process is fast, accurate, and directed to the correct contact person to avoid administrative delays.
4. The Ultimate Protection: Invest in Trade Credit Insurance
While the strategies above help you manage risk, they don't eliminate it. Trade Credit Insurance (TCI) is the most effective strategy to transfer the risk of non-payment.
TCI is an insurance policy on your business-to-business accounts receivable. Its benefits are twofold:
- Protection: It protects your company from financial loss if a customer fails to pay due to insolvency, protracted default, or political risks. The policy can pay a significant percentage (often up to 90%) of the outstanding debt, protecting your cash flow and balance sheet.
- Prevention: A key part of TCI is the credit intelligence and monitoring provided by the insurer. At Allianz Trade, we provide expert analysis on the creditworthiness of your customers, helping you make smarter decisions and avoid high-risk sales in the first place.
Conclusion: From Risky Asset to Secure Growth Engine
Healthy trade receivables are the lifeblood of a growing B2B business. By diligently monitoring key metrics and implementing robust management practices, you can significantly lower your risk exposure. However, to truly secure this vital asset and unlock its full potential for growth, strategic protection is key. Trade Credit Insurance transforms your trade receivables from an inherent risk into a secure foundation for confident expansion.
Are A/R risks holding your business back? Talk to an Allianz Trade expert to learn how to protect your trade receivables.
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What is Export Credit Insurance? Export credit insurance helps companies remain competitive by offering open terms when letters of credit or prepayment may have previously been the only safe way to do business. In fact, foreign companies buy an average of 40 percent more when they are offered open terms, according to the World Trade Organization. Export credit insurance providers protect your sales from political risks, including import/export changes and foreign government intervention. Few companies can effectively compete without extending trade credit to their buyers. For exporters, getting trade credit insurance levels the global playing field. Working with new countries means dealing with new cultures and new opportunities to access new markets and customers. Businesses must know to manage the associated credit risks that come with exporting products or services.