Understanding the dynamic link between accounts receivable and accounts payable

The accounts payable and accounts receivable functions are important interconnected components of the financial process within a business. While they have distinct roles, they are closely linked in managing the flow of funds across a business.

Accounts payable (AP) represents the money a business owes to suppliers for goods or services received. This function is responsible for processing and recording invoices, verifying the accuracy of the billing details, and ensuring timely payment to the creditors.

Accounts receivable (AR) represents the money owed to a business by its customers, and encompasses the invoicing process, tracks outstanding payments, and ensures timely collection. 

In this article, we delve into the powerful connection between both functions and how digitising these processes can unlock efficiency and improved financial performance.

You can also download our Business Survival Guide: How to manage cash flow in uncertain times, which outlines everything that businesses need to do to optimise their cash flow and grow.

Transforming accounts payable and accounts receivable processes with smart tech

When AP and AR processes are digitised, they can seamlessly integrate with each other, facilitating efficient cash flow management. For example:

• Timely payment of AP invoices ensures good relationships with suppliers, which may positively impact the buyer’s credit terms and purchasing power.

• Efficient AR processes lead to timely collections, which improves the supplier’s cash flow.
• Clear visibility into AP and AR data helps businesses analyse their financial position, identify potential bottlenecks, and make informed decisions to optimise cash flow and working capital.

By streamlining and automating AP and AR processes, businesses can improve their financial management, enhance cash flow, and strengthen supplier/buyer relationships.

The impact on profit, loss and cash flow

Efficient management of both functions directly affects profit margins, prevents losses from bad debt or penalties, and ensures healthy cash flow. Here’s how it’s all linked:

Profit:

• Timely collection of AR directly affects profit. If AR is collected promptly, it increases the cash inflow which positively impacts profit margins. Delayed or uncollected invoices can lead to reduced profitability or even losses.
• Efficient management of AP affects profit through various aspects. Prompt payment of AP may lead to improved supplier relationships, potential discounts, or favorable credit terms, ultimately reducing costs and positively impacting profit. Delayed or mishandled AP can result in damaged supplier relationships, additional fees, or strained cash flow, which can lead to decreased profitability.

Loss:

• If customers fail to pay their outstanding invoices, it can result in bad debt or uncollectible accounts. Unpaid AR represents a loss for the supplier as it reduces the expected cash inflow and negatively impacts profit.

• Late payments to suppliers may result in penalties, interest charges, or damaged supplier relationships. Additionally, if AP is not properly tracked and managed, it can lead to duplicate payments or overpayments, resulting in financial losses for the business.

Cash Flow:

• When customers pay their invoices on time, it increases the cash inflow, enabling the supplier to meet any financial obligations, invest in growth opportunities, and cover operating expenses. When delays happen, it strains cash flow, leading to liquidity challenges and potential difficulties in meeting financial commitments.
• From the AP side, timely invoice payments mean you can maintain smooth relationships with suppliers and prevent disruptions in the supply chain. It also helps businesses avoid late payment penalties or damaged credit terms. Proper AP management ensures that cash outflows are optimised, preserving cash flow for other business needs.

Streamline your processes with Spenda

Removing friction from your invoicing and payment processes is critical for unlocking capital and boosting cash flow. Taking proactive steps above to optimise your accounts receivable and accounts payable processes will provide consistent invoicing and payments data, which can be used to strengthen commercial decision-making too.

Whether you’re looking to get paid faster, streamline your invoicing processes, or scale your payment capabilities, Spenda can help. Our Business Survival Guide: How to manage cash flow in uncertain times, outlines what you can do to optimise business cash flow and grow faster. Click here to download your free copy.