Accounts payable may be defined as money owed by a business to its suppliers. It is shown as a liability on a company’s balance sheet under the heading current liabilities. It’s distinct from notes payable liabilities, which represent debts created by formal legal instrument documents.
Another usage of accounts payable refers to entity’s obligation to pay off a short-term debt to its creditors.
Importance for the business
Accounts payable in general represent funds that are borrowed from suppliers. Hence, they are considered a source of cash. Paying them represents using of cash. In business world, suppliers want the time for paying to be as short as possible, while creditors want longer payment terms so they could slow down the cash flow.
Some of the most important features of the accounts payable are:
- Company cash flow – cash flow is one of the most important metrics in the financial management of a business firm. It comes from firm operations, investing, and financing. If a company does not show positive cash flow every accounting period, it can have problems with paying bills and it might run into problems with its suppliers.
- Relationships with suppliers – suppliers are the businesses from which companies get their inventory. It is very important that business operations maintain good relationships with their suppliers. The most important thing a company can do to maintain good supplier relationships is to cover all bills on time. As a company grows, the number of its suppliers grows as does the invoices it has to pay. Good supplier relationships provide a win-win situation for the company and the supplier.
Their effect on profitability
- If a company has a set of best practices in accounts payable management and follows them, accounts payable can have quite a positive impact on the company’s profitability. The company has obligation to pay its bills on time.
- If the bills are paid on time, the trust between company and its suppliers will be greater, regardless of the number of suppliers a company has. That practice can help company in a number of ways, including discounts which can positively impact company’s profitability in a big way.
A best practice is to try to facilitate processing of accounts payable with a minimum of staff and paperwork. With minimalistic approach to the accounts payable management profitability will be increased by decreasing personnel and time spent on paperwork.