Cash flow is the number one reason why most businesses fail: 82% of small businesses go under due to poor cash flow. This challenge isn’t limited to small businesses, either. Just this year, KPMG found a discrepancy in accounting, including Accounts Receivable and Payable, at Meredith Corp., one of the biggest media conglomerates in the country.
“KPMG uncovered shortfalls in oversight of the processes used to calculate the fair value of Time Inc.’s accounts receivable and accounts payable, which were brought across to Meredith’s books when it purchased Time on January 31, 2018,” reported the Wall Street Journal.
Accounts receivable and accounts payable are critical aspects of a business’s financial health. Understanding how these two accounting functions impact your cash flow and overall growth can mean the difference between another year of healthy profit – and becoming another statistic.
Here’s what you need to know about optimizing the processes of accounts receivable and accounts payable.
What’s the difference between accounts payable and accounts receivable?
First, let’s review some basic business definitions. Accounts Payable keeps track of money that goes out of your business. When you make a purchase of goods and services from supplier or to a creditor that needs to be paid back in a short period of time, the entry in the accounting record is known as Accounts Payable (AP). The Accounts Payable team handles the money you owe; in other words, your current liabilities. Invoices and bills from purchasing goods from vendors go to Accounts Payable (AP).
Accounts Receivable (AR), on the other hand, keeps track of the money you are owed; in other words, your assets. The records and amounts from selling goods and services to clients go to Accounts Receivable. Outstanding invoices owed to your business are considered accounts receivable – the term refers to accounts your business has the right to receive because you have already delivered goods or services.
AR increases your business’s cash flow, while AP decreases it. Keeping your balance sheet healthy is a sure way to maintain your business’s good standing. Monitoring and clearing your accounts payable and accounts receiveable in real-time ensures that your business will not encounter cash flow problems in the future.
The importance of AP and AR
Where many businesses tend to run into cash flow issues is the accounts receivable side of the equation. “Hiccups in accounts receivable (A/R) collections can have drastic consequences for a business because it puts pressure on the amount of working capital required to fund operations,” writes one expert in Forbes.
One 2018 report found that overdue invoices represented 50% of all receivables at B2B companies surveyed. That places a huge strain on the resources of any organization. Businesses must make it a priority to avoid aging accounts receivable.
Likewise, for a business to stay afloat, it must avoid issues caused by delayed or missed payments, late fees, and overdue bills. Settling your accounts payable on-time is crucial to managing vendor relationships, building a trustworthy reputation, and avoiding penalties and fees that come from late payment. Late payments cause your partners to lose trust in you and your ability to pay for their products and services. Managing your AP is highly critical.
How can automation help?
To avoid bad debt – AR that’s been deemed uncollectible – and to ensure your AP is settled in a timely manner, businesses must build a strong, reliable system to keep cash flow moving. Managing these two crucial aspects of the business can be time-consuming and resource-heavy. As a result, smart business owners are turning to automation to help send and collect payments.
Machine learning and automation in managing cash flow ensure that nothing is overlooked. Automation monitors the many moving parts of AP and AR: from shipping orders, invoices, receipts, journal entries, to general ledgers and other financial documents.
To collect cash, for example, utilize AI-driven platforms that provide automated recommendations on when to collect and from which customer, based on data available on ERP systems. This can also make reporting easier and help you pinpoint issues such as delinquent accounts. AI-driven platforms can also automate forecasts by pulling in accounts payable real-time, giving your finance department greater confidence to make sound, data-driven decisions.
Accounts receivable and accounts payable are the two chief measures of your business’ cash flow, which is why it is crucial that they are both managed well. Otherwise, you may risk stumbling upon financial issues that could cost your business a great deal of money, or worse, cause its downfall.