It’s often put as accounts payable vs accounts receivable, but in reality these two aspects of accounting aren’t in opposition – they’re two ends of the same process. That process is a crucial, complex one on which the financial health of a business lives and dies.
Table of Contents
Get it right and you’ll bolster your ability to invest, protect against unexpected costs, and cultivate supplier relations. Get it wrong and your business can go under.
In this article we’ll look at the differences between the two processes, common AR/AP mistakes, and some ways to improve your processes.
Accounts payable vs accounts receivable: Explained
In short:
Accounts payable is money going out of the business and accounts receivable is money coming in.
But it’s more complex than that, and getting these two key aspects of accounting right can reap a business hefty rewards.
Understanding accounts payable (AP)
Accounts Payable (AP) refers to the amount of money a business owes. That may be to its suppliers, vendors, creditors, you name it – if the business owes it, it’s AP.
Items in AP are recorded as a liability on a company’s balance sheet. That’s because it’s an outgoing you’re obliged to pay, and it therefore affects your cash flow and accounts.
It’s often said in business that effective management of accounts payable is the core of good supplier relationships and ensuring smooth cash flow operations.
Understanding accounts receivable (AR)
Accounts Receivable (AR) refers to the money that a business is owed by its customers. This will tend to come from goods or services that have been delivered but not yet paid for, but it might be different if you are, say, a non-profit.
Accounts receivable is recorded as an asset on the company’s balance sheet. That’s because it represents incoming cash that the business expects to collect in the near future.
It is also said in business, that effective management of AR is crucial for maintaining steady cash flow and ensuring the financial health of a business. After all, your business lives and dies on how much money you’re bringing in.
How accounts payable works
When a business buys products or services on credit, the supplier issues an invoice Until the invoice is paid, the amount is recorded under accounts payable.
A finance department processes these invoices (promptly, we hope) and the money is sent out. Many businesses will have a constant churn of invoices to process, making AP an ongoing part of business operations.
Smooth AP relies on swift invoice processing. Timely payment of invoices helps businesses avoid late fees, maintain a strong credit rating, and build trust with vendors.
How Accounts Receivable Works
You can think of AR as the flip side of AP. When a business sells products or services on credit, it issues an invoice to the customer.
Until the invoice is paid, the amount is recorded under accounts receivable. A finance department might have employees chase down late payments, but generally it’s a waiting game until the money is paid.
The sooner customers settle their invoices, the quicker the business can reinvest the cash into operations, payroll, or expansion.
Impact of Accounts Payable on Cash Flow
We’re often asked how AP impacts cash flow, and what can be done to soften that impact. Essentially it’s a balancing act.
Pay invoices too quickly and you strain your cash reserves, reducing funds for essential expenses like payroll and growth investments.
Delay payments too long, and risk damaging relationships with suppliers, facing penalties, or, if vendors refuse to provide further goods or services, disrupting operations.
This isn’t a shameless plug (that will come later), but AP automation is one way to get this balancing act down to a fine art.
Impact of Accounts Receivable on Cash Flow
AR represents incoming cash, but if those payments are delayed you might feel some financial strain.
If customers take too long to pay, you might struggle to cover your own expenses. That makes high outstanding receivables a threat to your business health. These will show up in liquidity issues. The risks they pose make it essential for businesses to actively manage their AR process.
Best Practices for Managing Accounts Payable
- Negotiate Favourable Terms – Businesses should try to secure extended payment terms or discounts for early payments to improve cash flow.
- Use accounts payable automation software – Automating invoice processing reduces errors, ensures timely payments, and improves efficiency.
- Monitor Due Dates – Keeping track of upcoming payments helps businesses avoid late fees and maintain a positive supplier relationship.
- Reconcile AP Accounts Regularly – Verify invoices against purchase orders and receipts to prevent overpayments and fraud.
Another Article You Might Like to Read is...
The Best Po SystemA well-organized accounts payable system ensures that businesses can meet their financial obligations while optimizing cash flow. Proper AP management is essential for financial stability and long-term growth.
Best Practices for Managing Accounts Receivable
- Set Clear Payment Terms – Establish straightforward policies, such as upfront deposits or shorter payment deadlines, to encourage prompt payments.
- Send Invoices Promptly – Delayed invoicing often leads to delayed payments. Automating invoice generation helps maintain consistency.
- Follow Up on Late Payments – Implement a structured follow-up process, including payment reminders and late fees, to reduce overdue accounts.
- Offer Multiple Payment Options – Providing online payment methods, credit card options, or instalment plans can make it easier for customers to pay on time.
- Assess Customer Creditworthiness – Before extending credit, evaluate a customer’s payment history and financial stability to minimize the risk of non-payment.
By effectively managing accounts receivable, businesses can ensure a steady inflow of cash, reduce the risk of bad debts, and maintain strong financial stability. Proper AR practices not only improve cash flow but also strengthen customer relationships through transparent and efficient billing processes.
Accounts payable and receivable: what’s the difference
It’s pretty simple: AP is money going out, AR is money coming in. Because money going out is a debt, it’s a business liability. On the other hand AR is money your business is owed, so that counts as an asset.
| Feature | Accounts Payable (AP) | Accounts Receivable (AR) |
|---|---|---|
| Definition | Money owed by the business | Money owed to the business |
| Impact on Cash Flow | Outflows | Inflows |
| Role in Financial Statements | Liability | Asset |
| Examples | Vendor invoices, supplier payments | Customer invoices, credit sales |
Examples of accounts payable and receivable
To make this clearer, perhaps some examples are in order…
| Accounts Payable (AP) | Accounts Receivable (AR) |
|---|---|
| A restaurant that purchases food supplies from a vendor but has not yet paid. | A food supply company that has sent supplies to a restaurant on credit, but not been paid yet. |
| An invoice for raw materials in a construction company. | A shipment of cement that’s just sent out on credit |
Accounts Payable and Receivable: Debtors or Creditors?
- Accounts Payable represents amounts a business owes to suppliers or vendors. Since the company is obligated to pay, it acts as a creditor to those suppliers. In accounting, accounts payable is a liability because the business has to settle these outstanding payments.
- Accounts Receivable refers to money owed to a company by customers for goods or services provided on credit. Here, the business is the creditor because it expects payment from its customers, who are the debtors. Accounts receivable is classified as an asset on the balance sheet since it represents incoming funds.
Summary:
- Accounts Payable → Creditors (Company owes money)
- Accounts Receivable → Debtors (Company is owed money)
How AP and AR Work Together
Accounts payable and receivable interact in several ways. Again, maybe it’s best to look at this through an example. Let’s use a manufacturing company…
They purchase raw materials on credit from a supplier, recording this as accounts payable (a liability). At the same time, they sell finished products to retailers on credit, generating accounts receivable (the asset).
The key to this business’ success lies in ensuring that receivables are collected efficiently so that it has enough cash to pay its payables on time. If it can’t manage that, it’s goodnight Irene.
A healthy balance between AP and AR is critical for maintaining liquidity. If a company’s accounts receivable collection is slow, it may struggle to pay its accounts payable – and a business relies on being able to do that in a timely manner. What happens if you can’t pay your staff? Or your suppliers?
By managing both AP and AR properly, businesses can sustain smooth operations and financial stability.
Accounts payable and accounts receivable: common mistakes and how to avoid them
We’ve driven home the point haven’t we? Getting this stuff right is crucial for a healthy business. However, it’s often businesses make mistakes that can lead to financial trouble. Here, we’ve identified some key mistakes and how to avoid them:
Common AP mistakes and solutions
- Late Payments – Missing due dates can result in late fees and damaged supplier relationships.
Solution: Use automated payment reminders and schedule payments strategically.
- Duplicate Payments – Paying the same invoice twice leads to unnecessary cash outflow.
Solution: Implement invoice approval software to detect duplicates before processing.
- Lack of Proper Approval Process – Paying invoices without verification can lead to fraud or errors.
Solution: Establish a multi-level approval system before payments are made.
Common AR mistakes and solutions
- Extending Credit to Unreliable Customers – Allowing high-risk customers to buy on credit can lead to bad debts.
Solution: Conduct credit checks before offering credit terms.
- Slow Invoice Processing – Delays in sending invoices result in late payments and cash flow issues.
Solution: Automate invoicing and send reminders before the due date.
- Failure to Follow Up on Overdue Payments – Ignoring unpaid invoices can hurt profitability.
Solution: Implement a structured follow-up process with regular reminders. By avoiding these mistakes, businesses can improve financial efficiency and maintain strong relationships with both suppliers and customers.
The power of automation
There are some things you can do to avoid these mistakes, but the biggest, most effective catchall is automation. AR and AP automation dishes out numerous benefits that enhance efficiency, accuracy, and financial stability for businesses.
One major advantage is time savings. Manual processing of invoices and payments can be slow and error-prone. Automation streamlines tasks such as invoice approvals, payment scheduling, and reconciliation. This reduces the workload on finance teams and allows them to focus on more strategic, rewarding activities.
Another significant benefit is error reduction. Manual data entry in AP and AR often leads to mistakes such as duplicate payments, incorrect amounts, or misapplied receipts. Automation eliminates these risks by using digital tracking, automatic matching of invoices to purchase orders, and flagging discrepancies before processing.
Improved cash flow management is another key advantage. Automated AP ensures payments are made on time, helping businesses avoid late fees and take advantage of early payment discounts.
Similarly, automated AR accelerates invoicing and follow-ups, reducing payment delays and improving cash inflows. Additionally, automation enhances transparency and compliance. With digital records, businesses can track payments, monitor outstanding invoices, and generate reports for audits effortlessly.
To put it simply, by automating both AP and AR, you can improve your financial accuracy, reduce costs, and enhance overall business efficiency.
FAQs: Accounts Payable vs Accounts Receivable
Accounts payable (AP) is money owed to suppliers—it’s a liability. Accounts receivable (AR) is money owed to the business by customers—it’s an asset
Timely AP payments build supplier trust and maintain creditworthiness. Efficient AR ensures strong cash flow and protects against liquidity issues.
AP represents cash going out, while AR is cash coming in. Managing both effectively helps balance liquidity and avoid cash shortages.
Yes. Automation improves accuracy, speeds up invoice processing, and strengthens cash flow by reducing manual tasks and delays.
The quickest way is with automation. It helps you process invoices faster, avoid errors, and stay on top of payments and collections.
AP includes unpaid supplier invoices or bills. AR includes outstanding customer invoices for products or services sold on credit.
Delays, duplicate invoices, poor credit checks, and lack of follow-up are common causes of AP and AR problems.
A word from Zahara
How do we know all this? Accounts payable is our wheelhouse – more specifically, automating accounts payable. We know we’re biased but we’ve proved to all our clients that automating AP is one of the best ways to improve your operations. Don’t just take our word for it…
We work with Fortune 500 companies to bring them smarter, more reliable AP processes. It’s something we’re passionate about. If automation is something your business could benefit from, we’d love to talk to you. Give us a call or schedule a demo to see Zahara in action.
