KPI Example

Accounts Receivable vs. Accounts Payable: What's the difference?

Accounts Receivable is the money customers owe a company for goods or services they’ve received but haven’t yet paid for. Meanwhile, Accounts Payable is the money a company owes to vendors and suppliers for goods or services it’s received, but hasn’t yet paid for. Both Accounts Receivable and Payable will appear on designated lines on a typical balance sheet as short-term assets and liabilities, respectively.

Both of these KPIs are extremely important to keep track of, as they indicate if you’re paying your bills, if your clients are paying you, and if you have a solvent cash flow. Accounts Receivable and Accounts Payable are relevant KPIs for your finance team to monitor.

Why are Accounts Receivable and Accounts Payable important?

Accounts Receivable is an important KPI because it indicates if your customers are paying you in a timely manner. An increase in Accounts Receivable indicates an increase in the number of customers paying with credit; a decrease in Accounts Receivable indicates a decrease in the number of customers paying with credit.

Customers create an obligation to pay through daily business and sales transactions, so Accounts Receivable is tracked on a daily basis. The sooner your customers can pay you, the better, as this translates into more operational cash flow for the month.

Accounts Payable is important because it tracks your financial obligations to other companies. A vital aspect of fiscal responsibility, Accounts Payable is tracked on your balance sheet as a component of total debt.

An increase in payables indicates your company has delayed payment to vendors, and your cash remains with the company–a cash inflow. Meanwhile, a decrease in payables indicates your company will pay vendors eventually—a cash outflow.

Best practices for managing Accounts Receivable and Accounts Payable

Both Accounts Receivable and Payable are tied in with your operating cash flow.So to optimize your cash flow, it’s ideal to obtain your receivables as soon as possible, and to delay your payables as long as possible. Of course, if you need cash more quickly, you can offer discounts to customers who pay their debts ahead of time–and if you’re offered a discount by your vendor for submitting early payment, you should do likewise.

With this in mind, it’s essential to have a "terms and conditions" section on your customer invoice that will outline the terms of repayment, any interest charges, and the payment deadline.

In the end, the key to managing both Accounts Receivable and Payable is to balance your short-term financial needs (liquidity) against long-term obligations (debts). Your finance team should monitor these KPIs on a daily basis to ensure your company is optimizing its cash flow, and making the best short- and long-term fiscal decisions possible.

Other KPIs similar to Accounts Receivable and Accounts Payable include:

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