As a startup founder, you know the importance of stretching every dollar while scaling your business. Managing cash flow is critical, and understanding the money flowing in and out through accounts payable and receivable can determine your financial success.
Optimizing these processes in a startup environment where every decision impacts your runway isn’t just a financial task—it’s a survival strategy.
What are Accounts Payable and Receivable?
To fully grasp the importance of accounts payable and receivable, it’s essential to start with their definitions and how they function within your business.
Accounts payable (AP) refers to the money your business owes to suppliers or creditors. It’s considered a liability on your balance sheet because it represents an obligation to pay cash shortly.
Accounts receivable (AR) is the money customers owe your business by its customers. It’s considered an asset on your balance sheet because it represents cash you expect to receive soon.
Both AP and AR are essential for tracking money flow within your business. While AP deals with outgoing payments, AR handles incoming payments.
Examples
Understanding these concepts can be helpful, so let’s look at some practical examples.
- Accounts Payable Example: Suppose your business orders raw materials on credit. The amount you owe is accounts payable until you settle the debt.
- Accounts Receivable Example: If you provide a service to a client on credit, the money they owe you is recorded as accounts receivable until it is paid.
What are the Differences: Accounts Payable vs Receivable?
Now that you understand accounts payable and receivable, it’s time to explore how they differ. These differences significantly affect how you manage your business’s finances.
Josh Aharonoff, a fractional CFO for fast-growing companies, talks about accounts payable and receivable, saying, “These 2 accounts can cause wild swings in your cash flows.”
He further compares them as “Accounts Payable → the more favorable your credit terms with suppliers, the stronger your cash position. Accounts Receivable → the quicker you collect your cash, the less bad debt, and the more favorable your cash position.”
Placement on the Balance Sheet
The placement of accounts payable and receivable on your balance sheet provides insights into your company’s financial health.
- Accounts payable are listed as a current liability because they represent money that your business needs to pay out soon.
- Accounts receivable is listed as a current asset because it represents money your business expects to receive shortly.
To learn more about analyzing financial statements, read this article.
Process and Recording
The way you process and record AP and AR transactions significantly impacts your financial statements and overall cash flow management. Here’s a detailed breakdown with examples.
Accounts Payable:
When your business receives an invoice from a supplier, it’s recorded as a credit in accounts payable and a debit in another account, such as inventory.
Example:
Your business receives an invoice for $5,000 worth of inventory. Here’s how it’s recorded:
| Account | Debit | Credit |
| Inventory | $5,000 | |
| Accounts Payable | $5,000 |
Once the payment is made, the accounts payable are debited, and the cash account is credited:
| Account | Debit | Credit |
| Accounts Payable | $5,000 | |
| Cash | $5,000 |
This example shows how the invoice affects your financial statements when recorded and when paid, ensuring the transaction balances your accounts.
Accounts Receivable:
When your business issues an invoice for goods or services provided to customers on credit, it’s recorded as a debit in accounts receivable and a credit in sales revenue.
Example:
You issue an invoice for $7,000 for services rendered. Here’s how it’s recorded:
| Account | Debit | Credit |
| Accounts Receivable | $7,000 | |
| Sales Revenue | $7,000 |
Once the payment is received, the accounts receivable is credited, and the cash account is debited:
| Account | Debit | Credit |
| Cash | $7,000 | |
| Accounts Receivable | $7,000 |
These examples illustrate how AP and AR transactions are processed, recorded, and ultimately reflected in your financial statements, highlighting the importance of accurate management to maintain a balanced financial position.
Impact on Cash Flow
Understanding the impact of AP and AR on cash flow is essential for maintaining liquidity and ensuring that your business runs smoothly.
- Paying off accounts payable reduces cash flow since money is leaving the business.
- Collecting accounts receivable increases cash flow as money comes into the business.
To understand cash flow in detail, read this article.
Credit Terms and Discounts
Managing credit terms and discounts effectively can significantly influence your business’s financial stability.
- Suppliers might offer credit terms like net 30 or 60, meaning payment is due in 30 or 60 days. They may also offer discounts for early payment, such as 2/10, net 30.
- Your business might extend similar terms to customers, offering them a discount for early payment to encourage quicker cash inflow.
Best Practices
Implementing best practices in managing accounts payable and receivable is essential for optimizing your financial processes and maintaining strong supplier and customer relationships.
For Accounts Payable
Maintaining good relationships with suppliers is crucial, especially during vendor migrations. Lack of visibility during these transitions can lead to uncertainty regarding cost savings. Bunker’s platform tracks migration progress, giving you a clear view of the savings achieved during these transitions.
Automate Invoice Processing:
Manual invoice processing can lead to errors and delays, affecting your cash flow and supplier relationships. The key question is: How can you ensure timely and accurate payments?
Bunker automates the invoicing process, from receiving invoices to scheduling payments, reducing the risk of errors and missed deadlines.
Gain Visibility and Track Savings During Vendor Migration:
Vendor migrations often create uncertainty around cost savings. You might ask: What percentage of invoices are from migrated vendors?
Bunker provides real-time visibility into vendor data, allowing you to track these metrics and confirm that your migration delivers the expected savings.
Simplify and Automate Bespoke Internal Operational Workflow Processes:
Managing complex tasks like consigner payouts can be challenging. To simplify these tasks, Bunker lets you create custom workflows that automate these processes, ensuring compliance with your specific operational goals and reducing errors.
Leverage Early Payment Discounts:
Taking advantage of early payment discounts is a strategic way to reduce costs. The question is: How can you consistently capture these savings?
Bunker ensures that invoices are processed promptly, allowing you to benefit from early payment discounts and improve your cash flow.
By incorporating these best practices with the help of Bunker, you can transform your accounts payable processes into a streamlined, efficient system that supports your business’s financial goals and strengthens supplier relationships.
For Accounts Receivable
Proper accounts receivable management ensures steady cash flow and that your business has the funds to operate.
Streamline Invoicing:
Delays in invoicing can disrupt your cash flow.
Bunker provides tools to track and manage collections and drill down to the invoice level within seconds to get more context. You don’t need to spend hours trying to calculate DSO – Bunker calculates it for you with an interactive pie chart.
Maintain Customer Relationships:
Timely payments are essential for maintaining healthy cash flow.
Bunker helps you keep open communication channels with customers. Bunker’s AR dashboard efficiently tracks and manages collections, and you can drill down to the invoice level for deeper insights. This proactive approach helps resolve potential issues before they cause delays.
Encourage Early Payments:
Offering incentives for early payments can significantly improve your cash flow.
Bunker allows you to easily set up and manage early payment discount programs, encouraging customers to pay sooner. This boosts cash flow and reduces the risk of overdue payments.
By leveraging these strategies with Bunker, you can optimize your accounts receivable processes, ensuring a steady cash flow and stronger customer relationships.
How Does Automation Help?
Automation can significantly enhance the efficiency of managing both accounts payable and receivable, saving time and reducing the potential for errors. By automating routine tasks, businesses can save valuable time that would otherwise be spent on manual data entry and processing. This reduces the potential for human errors and ensures that financial operations are carried out consistently and accurately.
Accounts Payable
Managing accounts payable efficiently is vital for maintaining good supplier relationships and ensuring your business meets its financial obligations.
- Optimizes Invoice Processing: Automation streamlines the workflow, ensuring invoices are handled efficiently. This reduces the time spent on manual entry, minimizes the risk of late payments, and keeps cash flow steady. Ensuring timely payments helps maintain strong supplier relationships, which is vital for ongoing business success.
- Provides Vendor Insights: Automation tools offer comprehensive dashboards that provide clear visibility into vendor concentration and allow for detailed transaction-level analysis. This visibility helps manage payments more effectively and avoid issues like missed payments. Tracking and managing category payments more easily keeps your financial management organized and proactive.
- Analyzes Prior Spend: Automation enables you to explore prior period vendor spending to identify potential issues before they escalate. This proactive approach ensures that your accounts payable process remains smooth and efficient, ultimately reducing costs and improving financial stability.
Accounts Receivable
Effective accounts receivable management helps maintain a healthy cash flow and minimizes bad debt risk.
- Streamlines Collections Management: Automation in accounts receivable is designed to track and manage collections efficiently. By allowing you to drill down to the invoice level, automation helps you easily see where your money is tied up and identify which customers are causing payment delays, enabling you to take timely action.
- Identifies Problem Customers: Automation helps identify problem customers early, allowing you to set up reserves or take other actions to mitigate risks. Addressing these issues before they escalate helps maintain a healthier cash flow and reduces the risk of bad debt.
- Enhances Cash Flow and Working Capital Insights: Automated tools provide detailed views of cash flow category movements, offering clear insights into where your cash is going and how it’s utilized. Working capital insights are enhanced, helping you make informed decisions about freeing up resources and improving liquidity.
By implementing automation in accounts payable and receivable processes, businesses can achieve greater efficiency, reduce errors, and maintain strong financial health.
What is the Role of Bunker in Streamlining AR/AP process?
Bunker’s platform doesn’t just automate AP and AR processes—it empowers you with the tools needed to optimize them fully. By leveraging Bunker’s AR and vendor dashboards, you can identify the needle movers in your AP and AR accounts, ensuring you manage cash flow efficiently and effectively.
Accounts Receivables:
Identify Top Customers: Bunker allows you to conduct customer attribution analysis, linking revenue and costs to specific customers or segments.
This is especially useful if your company serves various customer segments with differing profitability.
Track AR Aging: Bunker’s AR dashboard also helps you clean up GL tagging, better anticipate bill payments, and spot problem customers faster.
Accounts Payable:
Bunker’s vendor dashboard is crucial for:
- Reviewing OPEX to ensure proper COGS allocation
- Spotting potential misclassifications
- Ensuring accuracy in expense reporting
Drill-down to the details: Don’t miss important transactions in Accounts Payable. Utilize prior over-period vendor spend analysis in Bunker for this and stay on top of every transaction.
Better anticipate bill payments: Analyze payment obligations, negotiate extended terms, and optimize cash flow for timely bill payment.
Whether using the cash flow dashboard to track movements or the working capital dashboard to understand where cash is tied up, Bunker provides a complete financial overview that helps you stay ahead of problems and make informed decisions.
Transitioning from manual methods to an automated system like Bunker saves time and enhances the efficiency of your financial operations.
For a closer look at how Bunker can optimize your financial processes, consider starting with a 14-day free trial today. There’s no credit card required, and you can set up instantly to begin improving your accounts receivable and accounts payable management.
