When you run a business, it often happens that you need to buy or sell goods “on credit”. There’s nothing unusual about it, yet those are the situations where accounts payable (AP) and accounts receivable (AR) processes play a significant role. The problem is some people still don’t know what those processes are and what makes AP different from AR – and vice versa. No need to feel ashamed if you belong to that group, as the concept of AP/AR can be viewed as something rather complex. Still, it all depends on how good you are at explaining things to others. Our goal with this article is to explain – in the simplest way possible – what AP/AR processing is all about.
Accounts payable
The difference between accounts payable and accounts receivable is about who owes money to whom, basically. Accounts payable (AP) indicates how much money a company owes to a vendor or seller for the goods or services they provided. As you probably guessed, accounts receivable is just inversed AP as it refers to the sum that the company is owed by other businesses. Simple enough? So, let’s get into some details.
Accounts receivable
Accounts receivable are usually classified as assets, but accounts payable are categorized as liabilities (short-term liabilities are payable in less than a year, long-term are payable in more than one year). Both AP and AR are extremely important for a company’s cash flows (for balancing its revenues and expenditures), especially now that so many businesses are running on ‘late’ payments. With a lot of money frozen on their balance sheets, companies are unable to invest in growth or reduce their debt as they left without enough capital.
The only way for them to solve this issue is to optimize and properly manage their AP/AR processes. After all, you can’t expect your business to grow (or reach a higher level of financial health) if you don’t know who owes who and how much money they owe them. From having some payments missing, you can only go to having damaged relationships with your partners. From having too many liabilities, you can only go to fighting for your company’s survival. To be able to optimize your AP/AR processes, you need to know precisely what those processes look like in real life. Don’t worry – we got you covered.
Accounts payable processing – How does it work?
Okay, so it’s not that difficult either. Actually, the whole process can be divided into three major steps.
- Receiving an invoice – Once you’ve purchased goods (or a service) from a vendor, you’ll receive an invoice that you will need to settle.
- Registering the invoice – Here, you need to make sure that the information regarding this particular transaction will be included in your ledger.
- Settling the invoice – The vendor receives money for the goods/services they provided.
Okay, so how does accounts receivable processing look like?
As you can imagine, it’s very much like AP processing, but in reverse.
- Sending an invoice – Once you’ve delivered the goods (or provided a service), you send your customer an invoice.
- Monitoring the transaction – All transactions should be monitored so that you can send your client a message to remind them about the payment (if they haven’t paid you by that time).
3. Receiving your payment – The money finds its way to your bank account.
The best way to optimize your AP/AR processes is to use a data exchange system
Of course, you could perform the activities listed above manually, but that would be largely ineffective. If you really want to improve your business performance, reduce operational costs, and build stronger relationships with your customers and business partners, you need a modern data exchange platform such as e-invoicing or an EDI system. Many of the solutions available on the market were developed specifically to help today’s companies automate their document exchange processes and become fully compliant with the latest e-invoicing regulations – no matter their size or technological maturity.
Having said that, no two data exchange systems are alike, so you must choose the one that you feel is right for your company. Thus, you need to make your choice count – the success of your document management endeavors depends on it.