Accounts payable Vs Accounts Receivables: A Quick Guide

Accounting and finance are two complex aspects that require high documentation and implementation
of meticulously planned processes. Account management remains vital for a business, as, without an
account, any organization will feel like a fish out of water. Organizations struggling to manage
accounting and finance effectively need to develop proficiency in two basic financial flows- expenses and
revenue.

The other simplistic way to refer to such a process is the money going out and the money receiving. The
money that comes in or accounts receivable is vital to keep a business afloat, allowing it to operate for a
lengthy period smoothly. However, an organization needs to keep track of expenses and continue
making endeavors for managing costs where the accounts payable management comes in.

By keeping track of the accounts receivable and accounts payable, you will understand your business
health. Further, you can have an improved understanding of the financial situation of your business
when you start updating records for whom you owe money to or who owe money to you. In the
following paragraphs, a detailed discussion will make the subject of account receivable and account
payables clearer.

Accounts Receivable and Its Importance

To explain, an account receivable is the money that customers owe to a company. The accounts
receivable record money that a company has the right to receive but has not received yet against the
service or product provided to its customers. Often such an account comes with a term for payment that
may range from 30 days or more, offering flexibilities to customers, clients, or any other company to
settle the amount.

The accounts receivable remains significantly crucial, indicating the successful execution of orders by a
business and the possibility of fund inflows. The accounts receivable gets considered as an asset in the
balance sheets and accounting world since, in the future, such assets can get converted into cash.
Further, AR also remains crucial for a company having investors and if the company is considering
borrowing money. From the perspective of investors and lenders, the accounts receivable of a company
is vital as it indicates a business position making money or expending money.

Besides, a company faced with cash flow issues can use accounts receivable to make short-term
financing. The accounts receivable allows a company to sell outstanding invoices at a value lower than
the face value of such invoices. Such a process, termed invoice financing, finds use for meeting
guaranteed funds required for meeting short-term cash flow. Accounts receivable of a company remains
a crucial indicator of the liquidity position, allowing changes in sales or purchases, if necessary, like
pricing.

Adding the accounts receivable, the lifeblood of a business, with other assets and further subtracting
liabilities or the accounts payable indicate the amount owed by a company to the vendors or suppliers.
A positive figure tells that the company is profitable, and a negative figure tells that the company needs
to make immediate decisions to reduce liabilities or increase assets. Research indicates that the longer
the time taken by a company to collecting money due on accounts receivable, the lesser are the chances
for the business to collect the debts ever.
Strictly speaking, if there is a likelihood of late payment turning into nonpayment means that the
company may have to write off the bad debts and have to recover elsewhere. When a company fails to
manage the accounts receivables, it can face several problems that are as follows.

 Chances of Missed Payments

In certain instances, clients can neglect or forget to pay the bills. If the reliability of your
accounting system is poor, you will not be able to notice the possibilities of such incoming
revenue.
 Invoices not Sent
Automated invoice sending is now increasingly finding adoption in modern accounting systems.
However, regular auditing of the accounting system is mandatory to ensure that the clients and
customers receive the invoices timely.
 Inadequate Cash Flow
A company can face severe consequences resulting from mismanagement of accounts
receivable remains the inability to pay overhead, meeting payroll, or accessing advantages
extended by a business opportunity.

A business needs to automate the accounts receivable, to make the accounts receivable system more
efficient. When a billing and accounting software system gets set up, it is possible to send all the invoices
on time and track the clients or customers at fault more accurately. Moreover, implementing an
efficient debt collection system allows addressing nonpayment issues of customers so that customers do
not fall into further debt, which could otherwise worsen the situation.

Accounts Payable and Its Importance

When any company buys things on credit that is needed to pay back within a short time or period, it can
get termed as accounts payable. As part of general accounting, the accounts payable comes with a
specific mission of managing and overseeing the payments and the money flowing out. Accounts
payable remains a debt payment, short-term in nature, needing timely payment to avoid defaulting.

Account payable does not restrict to companies only, and even an individual can have accounts payable.
For instance, people consume electricity or cable TV and broadband services or telephone amongst
others., where timely payment against the service provided is necessary to avoid defaulting. It is also a
case of accounts payable, and from a company’s angle, the account receivable by one company from
another company becomes an account payable to the other company.

Accounts payable system efficiency directly relates to the financial stability of an organization impacting
the organization’s credibility and reputation. If a company is too slow or takes a too long time to settle
the accounts payable, it can adversely affect the brand reputation. The software or system used by the
accounts department remains pivotal to ensure the smooth functioning of accounts payable.

Even if an organization has a talented team, inefficiencies in accounts payable can cause problems and
affect the overall performance of an organization. For such reasons, it is crucial to keep the team and
accounts payable department highly efficient and organized to manage financial performance and
expenditures. For several reasons, accounts payable remains vital for an organization. 

Excepting payroll, the accounts payable function or procedures includes every aspect of the settlements
of an organization. Despite the firm size, the accounts payable goal remains a crucial element for
maintaining working capital, paying for legit and accurate invoices and bills of an organization only. The
invoices must show the services or goods collected or ordered by a firm and the calculations, unit cost,
and total amounts. Such procedures need implementation before keying in the supplier invoice in the
accounting records and arranging to pay.

Proper internal controls in the account payable process are necessary to keep the cash and other assets
of a firm safe. A few reasons for enforcing an efficient internal control process include avoidance of
payments for inaccurate or illegally claimed invoices, preventing a firm from repeating payment to the
invoice of the same supplier. It is also necessary to ensure that organization accounted for the entire
supplier invoices.

An efficient and accurate accounts payable process is necessary for a firm to get a precise and complete
financial statement. Further, when accounts payable gets improperly managed, there are chances of
losing discounts against settling a few bills quickly. Moreover, untimely payment to suppliers may result
in developing bad relationships with the suppliers and can even result in loss of supplier.