Accounts payable is one of the more important factors affecting cash flow. Bills coming due come right out of your revenue stream, leaving you with less on hand for discretionary purchases. The more carefully you plan when to pay your bills, the better you'll be able to manage and juggle these financial demands, making choices that keep your business both forward-thinking and solvent.
Accounts payable represents bills that you have to pay in the short term. It's only a matter of time before the payment leaves your bank account, thus reducing the amount of cash that's available to your business.
What is Accounts Payable?
Your accounts payable balance reflects the amounts that you owe to suppliers, contractors, tax agencies, utility companies and anyone else you've done business with and haven't yet paid. You record the bill as soon as it comes in, but generally, you don't have to pay the bill for a few days or weeks. For example, if you order some supplies from a vendor on "net 30" terms, you'll record the bill as an account payable when the invoice lands on Jan. 10, but it doesn't fall due for payment until 30 days later on Feb. 9.
How Does Accounts Payable Affect Cash Flow?
You can manage accounts payable by paying everything you can as soon as you can, or you can hold off on paying until the last possible date allowable according to the invoice terms. Either way, it's good business practice to consistently pay by the due date to keep your vendors happy, so they will continue to supply your business with the goods and services you need. The discretion to pay accounts payable at any point up until a due date gives you the flexibility to make judgment calls based on a range of variables, such as whether you need to reorder a particular item soon, or whether you need to hold back payment for a few days until some revenue comes into the business to help with your cash flow.
What's the Relationship Between Accounts Payable and the Cash Flow Statement?
On your cash flow statement, accounts payable appears in the section that summarizes outgoing cash. To plan incoming and outgoing funds month by month, you should summarize the bills that are due each month and enter the total as an outgoing sum, which will be subtracted from your incoming cash to show your remaining cash on hand. This entry will help you plan for the monthly amount that you will put towards paying your bills, but you still need to schedule specific payments when they are due within the current month.
What's the Relationship Between Accounts Payable and the Balance Sheet?
Accounts payable appears on your balance sheet as a short-term liability. It decreases your net worth even if you still have the funds on hand because you know it's just a matter of time before they leave your bank account. On your balance sheet, accounts payable is different from a long-term liability such as a term loan, which will be paid over a period of years. Long-term liabilities affect cash flow as well, but their payments tend to be more consistent and therefore require less planning.