Accounts Receivable vs Accounts Payable: What’s the Difference and How They Help Streamline Cash Flow?

Introduction

You’ve heard the terms “accounts receivable” and “accounts payable” so many times, but what do they really mean? How do they impact your business, and how can you accurately track this essential financial data?

If you’ve never considered these questions before, read on to discover what accounts receivable is, what accounts payable is, the key differences between them, and why you should care.

Additionally, this post will guide you through optimizing your accounts receivable and accounts payable processes, ensuring smooth financial management for your business. Let’s dive in.

What is Accounts Receivable (AR)?

Accounts Receivable (AR) represents the outstanding amount owed to your business for goods or services that have been delivered to customers on credit. AR is listed as current assets on your balance sheet. The payment time for such accounts ranges from a few days to an entire calendar year.

Let’s consider an example of an FMCG company. For them, accounts receivable could involve invoicing retail stores and distributors for the products delivered. Until the payments are received, the outstanding amounts are categorized as accounts receivable. The accounting department closely monitors these receivables to ensure timely payments and maintain a healthy cash flow.

The AR process starts by assessing the credit risk of a customer and validating whether they are fit for business with your company. Once the purchase orders are processed and the goods or services delivered, invoices are sent to your customers. A/R specialists then need to make sure that they follow up with clients, collect the payments, identify deductions, and reconcile these payments to the corresponding invoice.

The AR process, in short, comprises credit risk management, invoicing, collections, cash application, and deductions management.

What is Accounts Payable (AP)?

Accounts Payable (AP) is the exact opposite of accounts receivable. It is the amount that your business owes to other businesses for the services or goods that you have purchased from them. AP is reflected as a current liability on your balance sheet.

Here are a few examples of accounts payable transactions: 

1. Purchasing goods or services from another company.
2. Obtaining a loan from a bank or financial institution. 
3. Procuring raw materials for production. 
4. Reimbursing travel expenses incurred. 
5. Acquiring equipment for business operations.

The AP process starts with collecting supply requirements from within the organization and seeking quotes from vendors for the items required. Once the deal is negotiated, purchase orders are prepared and sent. The goods delivered are inspected upon arrival and the invoice received is routed for approvals. The invoice data is matched with other documents such as PO and delivery receipts. It is then coded into the correct ledger and payments disbursed according to the terms agreed upon.

The AP process, in short, comprises supplier management, procurement management, invoice management, PO matching, tax compliance, and payments.

The AP process, in short, comprises supplier management, procurement management, invoice management, PO matching, tax compliance, and payments.

What Is the Difference between Accounts Receivable and Accounts Payable?

Understanding the difference between Accounts Receivable and Accounts Payable is essential for managing a company’s cash flow effectively. In this section, we’ll take a closer look at the key differences between AR and AP, highlighting how they impact a company’s finances and operations. The following table provides a detailed breakdown of the differences between AP vs AR.

A Closer Look at Accounts Payable vs Accounts Receivable: Understanding Their Impact on Your Business

While Accounts Payable vs Accounts Receivable might seem similar at first glance, they represent different aspects of a business’s financial health. AP refers to the money that a company owes to its vendors or suppliers while AR refers to the money that a company is owed by its clients or customers.

Managing AP and AR correctly is crucial for maintaining a healthy cash flow and optimizing working capital. A business with net positive working capital has more assets than liabilities, which can help to facilitate growth and ensure financial stability. To achieve net positive working capital, a business must maintain a healthy balance between its account payable vs receivable.

In order to manage these accounts effectively, businesses must have processes in place to accurately track their AP and AR. This includes tracking the timing of payments to suppliers and the receipt of payments from customers. By effectively managing AP and AR, businesses can maintain a healthy cash position, take advantage of growth opportunities, and build strong relationships with suppliers and customers.

In this section, we’ll explore the key role that account payable vs receivable play in cash flow management.

The Role of Accounts Receivable in Cash Flow Management

Keeping track of your AR is crucial for successful business operations. It ensures that you bill your customers on time and collect payments against those bills.

If you forget to bill a customer or collect their payment, your products or services remain unpaid, impacting your profitability.

The delays in sending invoices often lead to delayed payments.

Moreover, keeping track of your AR also helps you document proof of income when you file your taxes.

The Role of Accounts Payable in Cash Flow Management

AP is as important as AR. AP represents the unpaid expenses in your company. As your accounts payable stack up, it can get trickier to know which accounts need to be paid off first. This, in turn, can impact the quality of supplies you get, your market reputation, and rates at which you get goods or services.

When you manage your accounts payable well, it enables you to optimize your cash position. Efficient AP also lets you focus on other areas of finance like tax management and budgeting. Moreover, when you pay your dues on time, you can maintain good relationships with suppliers and vendors.

Account Receivable vs Accounts Payable: Understanding the Challenges

Dealing with financial matters can present various challenges, particularly when it comes to critical processes like AP and AR. Here are the common challenges that most businesses encounter when dealing with AP and AR functions:

The Most Common Accounts Receivable Challenges:

• Poor customer relations with late-paying customers.
• Lack of time to manage the collections process.
• Setting credit limits and conducting periodic credit assessments.
• Collections from bankrupt customers or customers on the verge of bankruptcy.
• Payment resolution tracking and resolution.
• Not having the right tools to manage AR accounts and data.

The Most Common Accounts Payable Challenges:

• Lengthy approval timelines and slow processing due to manual paperwork.
• Time-consuming and error-prone manual matching of invoices with purchase orders and goods provided.
• Fraud and theft via e-mail and other scams leading to significant losses.
• Missing invoices that inaccurately depict dues and cash balance.
• Duplicate payments due to a lack of acknowledgment from the supplier or use of multiple payment methods.
• Navigating these challenges is crucial for maintaining effective financial management and ensuring smooth business operations.

How to Effectively Manage Accounts Receivable and Accounts Payable

The financial functions of Accounts Payable and Accounts Receivable are closely related, and managing both of them effectively is essential for your business. 

However, specifically over the last few years, the payments industry has undergone significant changes, largely driven by Accounts Payable. These changes can significantly impact Accounts Receivable, making it important to understand the implications for your business. 

For example, implementing online portals for electronic invoices can enhance efficiency, but it may also create challenges for Accounts Receivable if suppliers have to deal with multiple portals and processes. To achieve optimal performance, there are four things your Credit and Accounts Receivable team can do.

1. Clean up your master files – By reviewing your customer lists and removing duplicate accounts, identifying related accounts, and ensuring that your existing accounts have current and validated contact information, you can streamline your billing and collections processes. In an electronic environment, it’s important to avoid wasting time correcting outdated or inaccurate information that can slow down the entire process.

2. Accept more than one form of electronic payment – To eliminate as many paper checks as possible, consider accepting payment via ACH, credit cards, and wire transfers. Work with your credit card merchant to ensure that you qualify for high ticket rates so that credit cards can be accepted for even more transactions.

3. Overhaul your customer enrollment tactics – Segment your buyers by transaction volume and size so that you can start a comprehensive enrollment campaign. Your goal should be to maximize the dollars flowing through the EIPP (Electronic Invoice Presentment and Payment) system. New customers should automatically be entered in the EIPP system and not be given the choice of receiving paper invoices or paying by check. 

4. Communicate and train – Make sure that every team member who has responsibilities related to the order-to-cash process understands the dynamics of an EIPP system and can support the product and its enrollment process. Good communication and training are essential to ensuring that everyone is on the same page and that the system is used to its fullest potential.

How Automation Can Streamline the Accounts Receivable and Accounts Payable Process

Successful businesses understand the importance of optimizing accounts payable and accounts receivable through streamlined workflows powered by automation. Embracing automated processes enables them to simplify their operations, minimize errors, and expedite essential financial tasks, ensuring a more efficient and effective financial management system. Let's explore how automation can transform your AR and AP processes for better cash flow management.

1. Automate Your Finance Operations with the Latest Technology

The automation of crucial yet mundane and time-consuming AP and AR tasks has become easier and affordable with the advent of RPA, AI, and other technologies.

Modern AR automation software lets you check the status of your receivables, track correspondence with your customers, and schedule alerts for payments. Keeping in touch with customers through emails and alerts about payments helps you avoid bad debt and speed up the cash cycle.

For payables, you can almost completely automate all the steps involved except for the approvals, which can be done in a few clicks. Automation software can also help you diagnose problems in your AP workflow and provide insights into your payments with analytics tools. AP automation also improves your payment accuracy. The best AP automation tools in the market capture invoice data at 99.5% accuracy.

2. Reduce Human Error and Improve Efficiency with Automation

Manual data entry and processing can be error-prone, leading to delays, incorrect payments, and even financial losses. Automation of AP and AR processes reduces the risk of human errors by eliminating the need for manual data entry and processing. Automated workflows ensure that invoices are processed accurately, payments are made on time, and reminders are sent to customers for overdue payments. This not only saves time but also reduces the risk of errors and improves the overall efficiency of your finance operations.

3. Improve Cash Flow Visibility with Real-time Reporting and Analytics

Automation software provides real-time reporting and analytics that give you a complete view of your cash flow and financial health. With automated AP and AR processes, you can easily track payments, invoice statuses, and customer balances, and monitor your cash flow in real-time. This enables you to identify and address any issues or bottlenecks in your finance operations quickly. You can also generate customized reports and dashboards that provide detailed insights into your financial performance, helping you make informed decisions to improve your cash flow and profitability.

By embracing automation in your AP and AR processes, you can streamline your finance operations, reduce errors, improve efficiency, and gain better visibility into your cash flow. This not only saves time and money, but also helps you make informed decisions, enabling you to grow and scale your business more effectively.

Streamlining Your AR Processes with HighRadius

Balancing both AP and AR is crucial for healthy cash flow. Having more payments going out and not enough coming in will result in a negative cash flow. Having a strong and healthy accounts receivable pipeline increases your asset balances and revenue realization.

Automating AR processes are key to addressing cash flow challenges. We offer AI-powered AR automation solutions for enterprises as well as small and mid-sized businesses at affordable prices. Our RadiusOne AR suite is designed specifically keeping the requirements and constraints of mid-market businesses in mind.

The RadiusOne AR Suite for Mid-Sized Businesses is designed to help you manage your collections with ease. The suite comprises Collections, Cash Reconciliation, Credit Risk, and e-Invoicing modules, all of which work together seamlessly to optimize your AR processes and improve your cash flow. We have helped clients such as ShurTech, J.J. Keller, and others optimize their receivables.

By using the RadiusOne AR Suite, you can streamline your AR processes, reduce manual intervention, and improve your cash flow. With real-time visibility into your collections, cash application, credit risk, and invoicing, you can make more informed decisions about your AR operations and optimize your cash flow.

If you’re interested in learning more about how the RadiusOne AR Suite can help you streamline your AR processes and improve your collections, schedule a demo with us today. Our team of experts will be happy to walk you through the features and benefits of the suite and help you determine if it’s the right solution for your business.

FAQs on AP vs AR

What are accounts payable and receivable examples?

An example of accounts payable is when a business purchases inventory from a supplier on credit but hasn’t paid for it yet. An example of accounts receivable is when a business provides services to a customer on credit, but the customer has not yet paid for the services.

Why does AP and AR matter a lot?

Accounts payable and accounts receivable play a crucial role in tracking both incoming payments and outstanding debts. Both are essential components for effective cash flow management.