Understanding the difference between AR and AP and how to Manage them Efficiently

How does your business handle Accounts Receivable and Accounts Payable? Do you even know what they are and how they affect your cash flow? For most small businesses, managing these two areas of their financials isn’t something that’s given much thought to because there are simply too many other things to worry about like day-to-day operations, the growth of the business, staffing issues, etc. When left unchecked though, AR and AP can cause major problems in your business, especially if your customers take too long to pay.

Accounts Receivable vs Accounts Payable

It’s tempting to lump these two together. After all, they’re both accounts. But it’s important not to confuse one for another, because handling them incorrectly can lead to problems later down the line. The main differences are that accounts payable refers specifically to money owed by your company (to suppliers, creditors), while accounts receivable refers specifically to money owed by your customers (to you). Here’s what you need to know about each: Accounts Payable This is where invoices should be recorded for money already spent on supplies, services or equipment needed to complete a sale. Think of it as an IOU—you promise to pay back cash at a certain date in exchange for goods or services delivered now. If you miss a payment due date or don’t pay on time, then there could be fees attached.

Accounts Receivable When a customer places an order with your business, he owes you money. While some companies take payment immediately upon placing an order (think restaurants and other businesses operating on a strict timetable), others allow their clients more leniency. Once again, if missed payments become a habit for any reason (good or bad) there may be penalties associated with late payments.

Improving Cash Flow

Whenever you extend credit, there is always some risk involved for both parties. And both are taking a certain amount of risk when they do business with each other. Cash Flow can be defined as the movement of cash into or out of a business – There are two aspects that need attention when it comes to cash flow i.e. Accounts Receivable (AR) and Accounts Payable (AP). The best method of managing accounts receivable is to establish policies that outline due dates on invoices in order to maintain positive relationships with your customers. It’s vital that these policies are enforced across your entire organization so everyone understands exactly what is expected of them at all times, therefore helping improve cash flow within your organization. While AP follows similar guidelines when it comes to policy enforcement but usually focuses more on ensuring expenses are paid in a timely manner by having strict procedures in place so suppliers aren’t waiting around for months without payment. Ensuring your policy documentation is well-structured and easily understandable by employees will help ensure productivity isn’t hindered by lack of understanding.

How to Manage AR and AP

Managing your accounts payable and receivable in a systematic manner is one of most important aspects in a business. An efficient management of Accounts Receivable (AR) and Accounts Payable (AP) leads to steady cash flow for any business, not just small ones. Understanding that, you would think that all businesses are handling it quite actively. Sadly, they’re not. A recent survey found that 57% of US companies have huge debts owed to them while 48% don’t even have invoices at all! The reason behind these disturbing statistics is lack of knowledge about managing Accounts Receivable and Accounts Payable. We will take care of it today with our simple guide on understanding what AR and AP are about. Let’s get started! First things first, let’s define each term briefly before delving into other details

CONCLUSION

Regardless of what business you’re in, knowing your accounts payable (AP) balance is essential for your success. If you find yourself with too much outstanding AP, it can be tricky to keep up. The same goes for times when you have credit notes—goods or services that haven’t been paid for yet but will be shortly. Without adequate planning around these factors, cash flow can become problematic—and ultimately hamper growth.

SOURCE: AR and AP Management Doesn’t Have To Be Hard: 4 Tips