Simply put, the difference between accounts payable and accounts receivable is that Accounts payable are amounts a company owes because it purchased goods or services on credit from a supplier or vendor. Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer. Accounts payable are liabilities. Accounts receivable are assets.
Let's assume that Company A sells merchandise to Company B on credit. (Perhaps the invoice states that the amount is due in 30 days.) Company A will record a sale and will also record an account receivable. Company B will record the purchase (perhaps as inventory) and will also record an account payable.
There’s an old saying, "There are two sides to every transaction." In accounting we also expect symmetry: Company A has a sale and a receivable, Company B has a purchase and a payable.
It’s fair to say that many small business owners and directors view Accounting as an “obligation”, rather than a “necessity”. We may be biased, but one thing is certain, any successful business should ensure they have an accurate and up to date sales ledger, and Accounts Receivable Age Analysis – also commonly known as an Aged Trial Balance. Countered by also having an accurate record of Accounts Payable, as regardless of the company's size, the mission of accounts payable is to pay only the company's bills and invoices that are legitimate, accurate and timely. Ideally, a company’s debts should be recorded and paid in a timely manner for maximum benefit, be that a discount for early payment, or avoiding strained supplier relationships leading to reduced credit facilities in the case of late payment. In a worst-case scenario, even a Limited Liability business director/owner could become personally liable if deemed negligent in not chasing debtors or in preferring creditors. So, to conclude, accurate & timely recording of Accounts Payable & Accounts Receivable is important, very important, both for success, and to mitigate potential failure.
Two words sum up arguably the most important factor in a successful business and the earlier you are in the life of your small business, the truer this becomes. These two words are “Cash Flow”.
Sales are important. Profits are even more important. Cash flow is infinitely more important than both of those, and that’s where managing a business is more important than running or owning a business.
You can sell 1,000,000 gadgets and still lose money. You can show $1,000,000 in net income on your income statement but not collect enough of the customer payments and go bankrupt when debts exceed receipts. At the end of the day, having more cash (ie. actual money in the bank) coming in rather than going out is the way you will ensure success for your business – and let’s face it, we all love the sweet taste of success, right?
Maintaining a healthy balance between accounts receivable and accounts payable is only possible if you can access accurate information. Green Quarter Consulting’s economical accounts receivable and accounts payable services in White Rock, Surrey, Langley, Abbotsford, Vancouver, New Westminster, Coquitlam, Burnaby and South Surrey BC will keep on top of your Bookkeeping, making sure everything is in the right place and if you opt for their affordable Cloud Accounting Services too you have instant access to the information needed to manage your business for success. We see so many businesses who lurch from one cashflow crisis to the next, “firefighting” as they go, and routinely losing their margins by offering discounts to customers to stimulate positive cashflow and shore up their poor management systems. Unfortunately, many customers then wait for the offer of a discount to pay your invoices, let’s face it, who pays full price at “The Brick?”
Be honest with yourself, does this sound a little like your business?
Getting cash flow right isn't easy, but it's very simple. Get paid as soon as possible, only spend money you actually have, and only if it will be used to help you make more money. Lather, rinse, repeat.
Running a business is hard enough, take off the blindfold, turn on the light and choose Green Quarter Consulting’s economical accounts receivable and accounts payable services so you have the accurate information you need, when you need it. Doing business with cash problems sucks, and will sap the energy out of the most enthusiastic business owner, so make the right choice, make accounting easy and most importantly, see your business succeed…