Don’t want to pay your suppliers too early, but also don’t want to pay them too late? It’s time to take a closer look at accounts payable.
So you have a stack of outstanding bills that need to be paid soon. Or maybe one of your suppliers is asking for payment faster than usual.
Welcome to the world of bill pay, or ‘accounts payable’ (AP) in accountant speak. AP is the total of unpaid bills your business owes suppliers and vendors for good or service you’ve received. On an accrual-basis balance sheet, it site under current liabilities: money that’s owed but not yet paid out.
Managing AP properly is about more than just negotiating favorable payment terms and staying on top of your invoices. It’s also about managing your relationships with suppliers and ensuring your business has enough cash for day-to-day activities.
Key takeaways
Accounts payable is a current liability. It’s short-term money you owe to suppliers, usually due in 15-90 days.
AP is the opposite of accounts receivable. Payables are the bills you owe, while receivables are the invoices others owe you.
In a journal entry, AP increases with a credit and decreases with a debit when you pay.
Managing AP well protects your cash flow, can earn you early payment discounts, and helps you maintain good relationships with suppliers in the busy season.
What are accounts payable?
Also sometimes referred to as “bills payable” or simply “bill pay,” “accounts payable” can actually refer to a few different things within a business.
At the most basic level, accounts payable refers to all of your unpaid bills. If you receive an invoice that you don’t plan on paying immediately, that’s one of your accounts payable.
Your accounts payable can include things like:
Bills for materials and supplies like lumber, seed, feed, fuel or parts
Monthly payments for vehicles or equipment
Utility bills for water and electricity
Contractor invoices for hauling, construction and custom work
Invoices for professional services, like accountants, lawyers, or consultants
Bills for maintenance and servicing equipment
If your business generates financial statements on an accrual basis, “accounts payable” also refers to a specific account on your balance sheet. Accounts payable are recorded on the balance sheet under current liabilities, and they can affect your business’ value on paper just like any other liability.
“Accounts payable” can also refer to the act of going through your bills every week or month, planning future payments, and renegotiating payment terms in a way that ensures the financial health of your business.
Altogether, “accounts payable” management usually refers to all three of these things: receiving invoices and bills, recording them in your books, and managing them in a way that benefits your bottom line.
Examples of accounts payable by industry
Accounts payable can look a little different depending your industry. Here are some examples of AP for operations like farms, construction businesses, or property management.
| Industry | Examples of Accounts Payable |
|---|---|
| Farming | Seed, fertilizer, irrigation parts, equipment loans. |
| Ranching | Hay, feed, vet bills, fencing materials. |
| Construction | Subcontractor labor, equipment rentals, hauling services, building materials. |
| Trucking | Repair services, broker fees, truck or trailer parts. |
| Property management | Maintenance contractors, landscaping services, utilities across units. |
Accounts payable vs. accounts receivable
Accounts receivable and accounts payable are two sides of the same coin: receivables are invoices you’ve sent to people you’re expecting to receive payments from soon. Payables are invoices you’ve received from other people that you yourself need to pay.
Here’s a breakdown of their differences.
| Accounts Payable | Accounts Receivable | |
|---|---|---|
| What It Is | Money you owe suppliers or vendors | Money customers owe you |
| Payment Direction | You pay bills | You send invoices |
| Balance Sheet Account | Current liability | Current asset |
| Normal Balance | Credit | Debit |
| Cash Flow | Cash going out | Cash coming in |
Why is managing accounts payable properly so important?
1. It improves cash flow
For many businesses, healthy cash flow can be just as important as profitability. Improving the way you manage your payables–by avoiding late payments and securing more favorable payment terms, for example–can free up cash for other parts of the business.
Taking a closer look at your accounts payable might identify other issues with the business that need addressing. If you’re regularly behind on supplier payments, for example, you might find that you need to follow up with your own customers about their outstanding bills.
2. It keeps your suppliers happy
AP is just as much a financial issue as it is about managing supplier relationships. When your suppliers send you an invoice for a product or service they already delivered, they’re technically extending your business credit based on trust.
Staying on top of those payments can help preserve trust and ensure that your suppliers are there when you need them most–when times are busy and you need to particularly rely on them, or when times are tough and you need to adjust payment terms.
3. It gives you peace of mind
For newer businesses that are growing rapidly and don’t have a dedicated bookkeeper, staying on top of bill payments can get tricky. Developing a routine for bill pay doesn’t just help the business’s bottom line and credibility with suppliers; it also gives you peace of mind knowing that everything is under control.
What is the accounts payable process?
The accounts payable process is the typical flow you’ll go through, from the time you get a bill from a supplier to the moment you pay it. Every bill goes through these five steps:
Receive and capture the bill. You get billed by your supplier or vendor through the mail, by email, or as a PDF. Record it so you keep track of all your AP.
Verify and match the bill. Check your bookkeeping records, including your purchase order, to make sure you were billed for the right item or service and the right amount.
Record the liability. Enter the bill in your general ledger or bookkeeping system, so you properly debit the expense and credit your accounts payable.
Schedule the payment. Determine the best time for your payment, so you can hold cash as long you need without missing the bill’s due date.
Pay and clear the bill. Send payment by ACH, check, or card, then record it in your books. Debit accounts payable and credit cash so the liability is cleared.
Best practices for managing accounts payable
Managing accounts payable is all about getting a firm hold on your cash flow, understanding your suppliers’ needs, maintaining good relationships and turning good bill pay practices into habits.
1. Do your homework
Before approaching new suppliers or signing new contracts, familiarize yourself with common and acceptable payment terms for your industry.
Understand the difference between Net 15, 30, 60, 90, know which terms are typical in your line of work, and know which ones your suppliers prefer and expect to be paid by.
Here’s a quick guide to understanding bill payment terms.
| Term | What It Means | When It's Used |
|---|---|---|
| Net 15 | Full amount is due 15 days after the invoice date | Small vendors and newer business relationships |
| Net 30 | Due within 30 days | Most commonly as the default across industries |
| Net 60, Net 90 | Due within 60 or 90 days, respectively | Larger suppliers, seasonal operations, or big orders |
| Due on receipt | Payable immediately | One-off vendors |
2. Master your cash flow
Since so much of the pain around accounts payable comes from cash flow uncertainty, one of the best things you can do to manage AP better is to master your cash flow.
Producing a cash flow statement for your business and segmented cash flow statements for different enterprises using accounting software like Ambrook can help you stay on top of exactly how much cash is entering and leaving the business every month.
Get in the habit of producing a cash flow budget at the beginning of the year, and create projections for different scenarios. Running through the best, worst and historical cash scenarios can help you get a better idea of how much cash you’ll have on hand every month to cover payments.
The more confident you can get about the numbers and exactly how much cash can leave the business while still keeping the lights on, the more confident you can be about managing vendor relationships and laying out cash.
3. Talk to your suppliers
If you’re enjoying solid cash flow and you’ve been with a supplier for a while, ask them whether they’d consider extending your business discounts for early payment.
If you run into cash flow problems, be open with your suppliers and ask them whether they’d consider special payment plans or more spread out payments, like being paid once a week instead of monthly.
If you’ve been with a certain vendor for a long time, it might not hurt to ask for more favorable payment terms–changing from net 30 to net 60, for example.
4. Set up a dedicated AP/bill pay system
A stack of physical invoices in your inbox probably isn’t going to cut it: your business likely needs a dedicated system for sorting through and tracking outstanding bills quickly and easily.
Designate a single day of the week or month to take care of bill payments, and set up some kind of calendar, spreadsheet or software-based system for tracking payments.
Accounting software like Ambrook can be particularly helpful for this. Want to know which invoices are coming up next? Or which bills were created recently? Ambrook’s filter tools let you know in seconds, and will remember your preferences for your next bookkeeping session
5. Pay your suppliers with a credit or spending card
If your vendor accepts card payments, paying them with a business or dedicated payment card can be a great way to stay organized and ensure your vendor gets paid quickly.
6. Become payment-agnostic
Your vendors might want to be paid in different ways–via physical check, card, cash or digital payment for example–so it pays to stay flexible.
Ambrook’s own payment tools can be particularly useful for maintaining payment flexibility, giving you maximum control over how you pay your bills and the ability to:
Have Ambrook mail their vendor a check on their behalf
Have vendors print a check themselves via an external bank account
Pay via ACH transfer, credit card, or Ambrook card
Pay instantly in-network via Ambrook Pay
Pay off-platform
Bookkeeping for ACH payments, mailed checks, and Ambrook Pay is also processed automatically, eliminating even more administrative work and saving users time.
Frequently asked questions (FAQs) about accounts payable
To summarize, let’s review the basics you need to know about accounts payable as an owner-operator.
1. What is accounts payable in simple terms?
Accounts payable, or AP, is the money your business owes suppliers and vendors for good or services you’ve received. In other words, your unpaid bills.
2. What’s an example of accounts payable?
If you’re a producer, one example of AP is the bill you receive from your feed supplier. For a property manager, an example of AP might be the utility bill you get each month for the rentals you manage.
3. Is accounts payable a debit or a credit?
Accounts payable is a credit. It’s a liability on your balance sheet, so it increases with a credit when you record a bill and decreases with a debit when you pay it.
4. Does accounts payable appear on an income statement?
No, accounts payable is a balance sheet item. While the associated expense will land on an income statement, the unpaid balance itself won’t.
5. How can operations and small businesses manage accounts payable more efficiently?
You can try setting a regular bill-pay day, tracking due dates against terms, taking early payment discounts when cash allows, or using accounting software like Ambrook to help you capture, approve, and pay bills in one place.
Take the guesswork out of bill pay with Ambrook
Ambrook takes your bill pay system to the next level, allowing you to track and manage your bills in one place while eliminating hours of repetitive administrative work every month with powerful automation tools.
Team members can capture and import bills in the field, batch upload multiple bills, and use powerful automation tools to save time on manual data entry and bookkeeping. Ambrook’s powerful payment tools also help businesses become payment method agnostic, allowing them to pay vendors how they’d like to be paid without the hassle.
Want to learn more? Start your 7 day free trial today.
This resource is provided for general informational purposes only. It does not constitute professional tax, legal, or accounting advice. The information may not apply to your specific situation. Please consult with a qualified tax professional regarding your individual circumstances before making any tax-related decisions.
