Accounts receivables and accounts payables are two sides of the same cash flow coin. On the one side, your accounts receivable is a current asset on your balance sheet because it’s money you’ll soon be receiving from customers or clients. On the other side, your accounts payable is a short-term liability on your balance sheet because it’s money you owe to vendors and creditors.
When both sides of your accounts payable and accounts receivable are well managed, your cash flow is healthy and your business has the space it needs to grow.
Keep reading to learn more about the difference between accounts payables and accounts receivables — and how both processes can help you grow your business.
Table of Contents
- What are accounts receivables?
- What are accounts payables?
- What is the difference between accounts receivables and accounts payables?
- Why are accounts receivables and accounts payables important?
- What is common between accounts receivables and accounts payables?
- What are examples of accounts receivables?
- What are examples of accounts payables?
- How to manage accounts payables and accounts receivables
What are accounts receivables?
Accounts receivable is the balance owed to your company for any goods or services you provided to customers on credit. Your total accounts receivables are the sum of your invoices sent to clients.
On your balance sheet, accounts receivable is listed as an asset because it’s money your company will have in the bank within a certain period of time, depending on your payment terms with customers.
In the event your company can’t collect some accounts receivables, that amount becomes what’s called “bad debt.” You can eventually use bad debt trends to anticipate your “allowance for uncollectible accounts” on your general ledger and better plan your company’s financial strategy.
What are accounts payables?
Accounts payable is the amount your company owes to vendors or creditors. Your total accounts payables are the sum of your short-term debt to creditors and invoices you received from suppliers who have provided your company with goods or services.
On your balance sheet, accounts payable is listed as a liability because it’s money that will soon flow out of your business within a certain period of time, depending on your payment terms with creditors and vendors.
Some companies choose to make payments on their accounts payables as close to their due date as possible to better manage cash flow.
What is the difference between accounts receivables and accounts payables?
Accounts receivables are the revenues that flow into your company from clients who have received goods or services on credit, usually within a 30, 60, or 90-day window.
Why are accounts receivables and accounts payables important?
Accounts payable and accounts receivable are important because they help businesses improve their ongoing cash flow.
According to brodmin, an independent late payment reporting directory, small businesses are experiencing cash flow problems after the pandemic because more than 10% of late invoice payments are written off as bad debt. That means SMBs are unable to collect 10% of their total accounts receivables.
To make matters worse, small businesses are losing 15 days every year chasing late invoice payments.
Tracking your accounts receivables is important because late payments to your business can affect your cash flow. If customers aren’t paying on time, you’ll need to follow up quickly and perhaps modify your business strategy if the problem is severe enough.
An automated accounts receivables process unlocks accurate tracking, so you can make informed decisions about your business.
On the accounts payables side, late payments to creditors and suppliers can result in two things:
- Additional interest and fees that your business wouldn’t have otherwise incurred
- Bad relationships with vendors who may not want to work with you again — and definitely won’t give you any discounts in the future
Accounts payable also makes sure your financial projections are accurate and not too optimistic. Unrealistic cash flow and revenue projections can cause you to make bad business decisions, and a functional accounts payable process can help you avoid mistakes.
What is common between accounts receivables and accounts payables?
Accounts payables and accounts receivables may seem like opposing teams, but together they accomplish many of the same things for your business.
1. Accounts payable and accounts receivable manage your cash flow (short-term financials).
Accounts payable and accounts receivable answer the same question: At what rate is cash flowing in and out of my business?
Your business doesn’t run on hopes and dreams — it runs on cash. Your accounts receivable and accounts payable processes are tied to your cash flow and allow you to spot problems before they become problems.
2. Accounts payable and accounts receivable inform accurate financial projections (long-term financials).
After adopting accounts receivable and accounts payable automation processes, you’ll be able to anticipate cash flow trends and incorporate them into your financial projections.
For example, an accounts receivable process will allow you to anticipate bad debt (unpaid invoices) for the next year based on what happened in previous years. Without an ongoing, accurate view of your accounts receivable over a long period of time, your revenue projections are an uninformed guess.
3. Accounts payable and accounts receivable ensure good audit trails.
Accounts payable and accounts receivable are both forms of comprehensive documentation on the cash flow of your business.
No one wants to get audited, but unfortunately it’s a risk of owning an SMB. Ongoing AR and AP processes can make the audit process less painful.
4. Accounts payable and accounts receivable can both be automated.
Additional payment integrations like Plooto can help you make and receive payments much faster while information flows back to your accounting software for automatic reconciliation. That means no more manually entering your accounts receivable or accounts payable into your general ledger once you get paid or pay someone else.
What are examples of accounts receivables?
Let’s say you own a small business — Design Toro — that sells graphic design services to nonprofit organizations. To attract a new customer, High Climate, your design agency offers net-60 payment terms on a monthly retainer of $5,000 for six months, invoiced on a monthly basis.
With an accounts receivable process, the money High Climate owes Design Toro during that 60-day invoice period is listed on a ledger under current assets. When High Climate pays their first invoice within that 60 days, Design Toro credits their liabilities account and debits their accounts receivable to record the payment.
What are examples of accounts payables?
Let’s say the same design agency, Design Toro, purchases ten iPads on credit from a third-party Apple vendor for a batch of new hires. The iPads are worth $5,000 with a net-30 payment, and the invoice is sent on July 9.
Design Toro would create an accounts payable entry in their accounting software, and credit the Apple vendor’s account $5,000 by August 15. When the payment is made, Design Toro debits $5,000 from their asset account.
How to manage accounts payables and accounts receivables
You can learn more about the complete accounts receivable process here, but for now here are our top tips for SMBs on how to best manage AR and AP:
1. Automate payments that auto-reconcile with your accounting software.
Accounting software doesn’t take care of receiving and making payments, but using a payments integration like Plooto will save a ton of time on manual entry once payments are made and received.
An automated payment platform that auto-reconciles the books in your accounting software is worth its weight in gold, because it means all relevant accounts payable and accounts receivable entries in your ledger — current assets and liabilities — will be kept up to date the moment payments are made.
2. Negotiate long payment terms with creditors and vendors.
Many small businesses are reluctant to negotiate longer payment terms because they may be afraid to inconvenience suppliers. But longer payment terms can free up more cash to run your business, which can make a difference if you’ve hit a bad snag.
3. Use accounting software.
Accounting software like Quickbooks and Xero can help keep your balance sheet accurate and automate follow up on any late invoices.
Remember how small businesses lose 15 days every year to chasing late payments? Most accounting software solutions let you write and schedule automated follow ups when invoices are due and when they’re three, seven, and fourteen days late.
02 Accounts Receivables vs. Accounts Payables: What’s the Difference?