Accounts receivable and accounts payable are two of the most important things for business owners to understand. The simple reason why? Well, these two elements are what dictate the money you bring in! In short, it’s easy to think of them as complete opposites. However, it’s important to ensure that you have a full understanding of the difference between the two in order to efficiently manage your business.
Let’s break down more in detail what these two types of accounts are.
What Are Accounts Receivable?
Accounts receivable are considered current assets to your business. It consists of any amount that customers currently owe you, but have not yet paid. Essentially, your accounts receivable will consist of all the payments made by your customers with credit. It represents a line of credit that the business has extended to their customers. In layman's terms, it’s more or less an IOU a business has given their client. The strength of a company’s accounts receivable can be analyzed by the days outstanding or the turnover ratio.
What Are Accounts Payable?
Accounts payable function in a similar way to accounts receivable, but they represent money that a business owes to its suppliers. As a company, you will have accounts receivable that represent money coming in, as well as accounts payable that represent money going out. Accounts payable, in essence, represents a short-term debt that a company owes to a creditor or vendor. These are payments that are outstanding and have not been made yet, or are due at some point in the future.
What Exactly is the Difference Between Accounts Receivable and Accounts Payable?
The difference between accounts payable and accounts receivable is actually not a huge difference in reality! It’s really just about the point of view you’re looking from. In many ways, they’re the exact opposite of each other! Let’s say you’re a business owner- the difference is simple. Your accounts receivable are the payments owed to you, while your accounts payable are the payments that you owe to someone else.
What Are The Benefits Of Accounts Receivable and Accounts Payable?
Essentially, having accounts receivable is great because it directly reflects how good your business is doing. It means you’re making sales which in short is the basic element on your path to success. All you need to focus on is ensuring a timely turnaround so that you’re collecting on the money you’re owed. So it’s great to see that you’re actually generating results, now your goal is to finalize the transaction so the revenue doesn’t get stuck in a no-man's land!
The same goes for accounts payable. Paying bills and getting paid are two indispensable aspects of your business- if they’re not organized, the rest of your company won’t be either! These accounts give you a clear and concise place to look when you want to understand what your next steps are and the overall state of your business.
How to Manage Your Accounts Receivable
There are several best practices to follow when it comes to managing your accounts receivable. It’s important to keep in mind that this is an element of your business that is right at its core. If you can manage this properly, it will help the whole of your business to run smoothly and efficiently. Let’s take a look at some of the top ways to properly manage this type of account:
- Get online. There’s no excuse for not processing payments online or allowing customers to pay online! Electronic invoicing eliminates a lot of the shuffle of paper invoicing, and it ensures that there is always a traceable record of everything. Not to mention, it avoids any delays.
- Be flexible. It’s your customer’s duty to pay you- but why not make it easier for them? Be sure that you offer many options for them to make their payments, including automatic payment systems.
- Review your receivables aging reports. The key to keeping your accounts receivable on point? Knowing what’s going on. A receivables aging report shows you exactly where your customers are at and which ones you need to follow up with. Make it a habit to review and deal with these invoices.
How to Manage Your Accounts Payable
Paying the bills is an essential and unavoidable part of running a business. Keep it organized and effective by ensuring that you are managing your accounts payable correctly. Check out this handful of tips for managing your accounts payable more efficiently:
- Simplify the process. Make sure that every aspect of your accounts payable process is simplified as much as possible. Limit yourself to a maximum of two check runs per month in order to avoid an unnecessary amount of processing.
- Use technology to your advantage. Using online and automated systems can not only make sure that your processes are faster, but also that they contain less errors.
- Keep an eye on your aging reports. This goes for accounts payable, too! Knowing what’s coming up and being prepared for it will help you stay organized and avoid any potential errors.
Let’s wrap up what we went over:
- Accounts receivable consists of money owed to you but not yet paid by customers. This represents credit that has been extended from your business to its clients.
- Accounts payable, on the other hand, consist of payments that you owe to vendors or suppliers that have not yet been paid.
- The difference between accounts receivable and accounts payable mostly stems from your perspective as either the customer or the business. It’s either money owed to a company or the money owed by a company to its vendors.
Now that you understand the details of both accounts, you understand just how crucial they are to the efficient operation of your business. When you’re working with credit and large amounts of customers, it’s absolutely essential for your accounts payable and accounts receivable to be organized. If not, not only could you be losing hours and hours of work, but you could also be missing payments or dealing with unhappy suppliers. See how others are using InvoiceSherpa to easily manage accounts receivables!