What Are Accounts Payable and What Does It Impact
To an individual, Accounts payable are just like the unpaid bills you have .
In a business perspective, Accounts Payable, abbreviated as A/P are the amounts owed by your business to your suppliers or vendors in exchange of goods or services that you’ve received from them. Accounts Payables are reflected on your Balance Sheet if you use the accrual accounting method (which simply means that the transactions are recorded when it occurs whether or not the cash has already been received/spent). Accounts payable are recorded under Current Liabilities, for these are considered as short-term obligations because it typically needs to be paid within one year. Common examples of accounts payable are equipment, raw materials, cleaning services, office supplies, utilities.
Having someone that handles your AP is important even for a small business. Accounts payable should be timely and properly recorded because if not, it can cause understatement of company’s current liabilities thus will result in an overstatement of the company’s net income due to payables not being accounted for accordingly.
Managing your Accounts Payable ensures that your bills are being paid accordingly to avoid costing your business more money by paying the penalties and other charges involved. If it’s you or a bookkeeper that’s handling your accounts payable, make sure to keep accurate records to prevent mistakes and to have a better view when it comes to cash forecasting.
Now, let’s talk about the AP’s impact on the business.
Your Relationship with the Vendor/Supplier
Thinking strategically on how to pay your invoices timely can help you establish and maintain a good relationship with the vendors/suppliers.
When a relationship of trust is built with the vendors, you benefit from more discounts, flexibility in payments, high quality service/materials. On the other hand, when you mismanage your relationship with your vendors, you can have a hard time negotiating the payments terms and more so they may no longer be interested in dealing business with you.
Good vendor/supplier relationships provide a win-win situation for both parties.
Your Cash Flow
When you have a longer payable period, you can take advantage of the delay of cash outflow and use whatever cash you have for other urgent matters.
One way of increasing a company’s profitability is by having an automated end to end AP process. This way you can lessen your paperwork and you can decrease staff.
Having a good accounts payable management process can surely have a positive impact on your company’s profitability. Paying your bills on time can create trust that can lead to discounts, prevent you from late penalties, both of which can have a significant impact on profitability.
In conclusion, as the business grows, and more suppliers or vendors are added to your list, It is crucial for your company to have a proactive approach to handling accounts payable by making sure that reports are being run regularly and bills are being paid on time.