Accounts Payable is the money a business owes its suppliers for goods and services that have been delivered to the business. The supplier would have also provided an invoice for the delivery.

Managing accounts payable is incredibly important as it directly affects the cash flow of the business. Cash flow is the lifeblood of any business. A business lives or dies by its cash flow.

It’s imperative that a business has enough cash to pay its bills to continue to operate.

When Are Accounts Payable Due to be Paid?

When accounts payable are due and when they are paid is a crucial part of managing a business.

For most business, accounts payable is usually due within 30 to 45 days.

As such, Accounts Payable are considered Current Liabilities or Short-term Liabilities on the business balance sheet.

Long-Term Liabilities

Long-term liabilities are debts that are due within a time frame of over 1 year.

Long-term debt is used to finance long-term assets such as equipment and vehicles that the business needs for its operations.

Accounts Payable on the Balance Sheet

Accounts Payable appear under Short-term Liabilities on the business Balance Sheet. 

Long-term Debt appears under Long-term Liabilities.

Together this represents the entire debt picture of the business.

An Example of Accounts Payable

Let’s assume that your business purchases wholesale office furniture and re-sells this office furniture to business clients.

When you purchase the furniture, the product will be delivered to your business by the supplier, and the supplier will also deliver an invoice to the business.

The payment amount due and due date will be detailed in that invoice. This will be recorded as Accounts Payable in the business Balance Sheet.

How Do Accounts Payable Affect Cash Flow?

In business, Cash is King.

Cash is the lifeblood and oxygen that keeps a business alive.

Cash flow is a measure of how much cash the business receives minus how much cash the business spends.

Note that Cash is very different from Revenue or Income.

A business can sell a product and record Revenue but the business has not yet received the cash from that revenue.

As such, when analyzing Accounts Payable, the focus is on the cash position of the business, and not its Revenue. The business cannot afford to pay its accounts payable with its Revenue if it does not have the cash.

In this way, Accounts Payable has a huge impact on your cash flow.

A rule of thumb is that the business wants to take as long as possible to pay its Accounts Payable while collecting on its Accounts Receivable as quickly as possible.

This requires proper planning and forecasting supply and sales numbers in order to strike this delicate balance.

If there is a gap or financial shortfall between when the business receives cash from its customers and when it pays its Accounts Payable to its suppliers, the business may need to take out a loan to fill in this gap.

The Best Time to Pay Accounts Payable

The best time to pay Accounts Payable is generally immediately before its due date.

In business, paying your bills too early could actually be a disadvantage. The business disburses cash before it absolutely has to. This reduces the business cash position; Cash which could have been used for further investment before the invoice came due.

There’s sophisticated software available on the market that can assist a business manager to forecast its cash flow and therefore determine the optimal time to pay its Accounts Payable.

In addition, the business can generally negotiate with its suppliers to alter payment terms on an invoice if it needs to.

Paying an invoice early is only beneficial if the business receives a discount for early payment.

Accounts Payable Software

Most good accounting software on the marketplace includes the Accounts Payable management tools, which really simplifies the process for even novice entrepreneurs.

A quick Google search of accounting software will deliver results of tons of appropriate software that can be used for managing Accounts Payable. It’s up to the business manager to select the software that match is its needs and budget.