When you manage a business, two financial terms you’ll encounter often are accounts payable (AP) and accounts receivable (AR). Understanding these terms, and how they work together, is important for keeping your cash flow balanced and your business running smoothly.
Below, we’ll explain what each term means, how they work, and why both are necessary for your business’s overall health.
What’s in this article?
- What is accounts payable?
- What is accounts receivable?
- How are accounts payable and receivable different?
- Why are both accounts payable and accounts receivable important to track?
- How Stripe can help track accounts payable and receivable
- What are common challenges in managing accounts payable and receivable?
What is accounts payable?
Accounts payable is the money a business owes to its suppliers or vendors for goods or services it has received but hasn’t paid for yet. Think of it as a running tab the business needs to settle, usually within a short time frame such as 30 or 60 days.
How it works
A supplier sends an invoice after delivering products or services.
The business records this as an “account payable” – a promise to pay.
Once the payment is made, the account is cleared.
Example
A coffee shop orders coffee beans and equipment on credit. The unpaid bill is part of its AP.
A small business receives a water bill and logs it in AP until it’s paid.
Keeping track of AP helps businesses avoid late fees, build good relationships with suppliers, and manage cash wisely.
What is accounts receivable?
Accounts receivable is the money a business is owed by its customers for goods or services it has delivered but hasn’t been paid for yet. It represents a current or short-term asset on the company’s balance sheet because the business expects to receive the money soon.
How it works
A business provides a product or service and issues an invoice to the customer.
The customer agrees to pay within a set period, such as 30 or 60 days.
Until the payment is received, the amount is recorded under AR.
Example
A freelance graphic designer completes a project for a client and sends an invoice. Until the client pays, the amount owed is part of the designer’s AR.
A bakery delivers a large order to a restaurant for a promise of payment next month. That unpaid amount is in the bakery’s AR.
For businesses, managing AR effectively is important because it ensures the business gets paid on time, maintains a healthy cash flow, and reduces the risk of bad debts.
How are accounts payable and receivable different?
Understanding the difference between accounts payable and accounts receivable is important for keeping your books in order. Here’s what to know.
Accounts payable
What it is
AP is the money your business owes to suppliers or vendors for products or services you’ve received but haven’t paid for yet.
Why it matters
AP is a responsibility – money your business owes that needs to be paid soon. Keeping track of what’s due and paying on time is important because doing so helps you avoid late fees and maintain good relationships with suppliers.
Example
Imagine you run a café and you order coffee beans and equipment from a supplier on credit. The supplier sends you an invoice for $1,000 and gives you 30 days to pay. That $1,000 is now part of your AP until you pay the invoice.
What it tells you
AP focuses on managing your outgoing money. It helps you track bills, plan your cash flow, and strike a balance between what’s owed and what’s in your bank account.
Accounts receivable
What it is
AR is the opposite of AP: it’s the money your customers owe you for products or services you’ve already delivered.
Why it matters
AR is money your business is waiting to be paid. Keeping track of AR is important because you need that cash to pay your own bills, cover expenses, and expand. If customers don’t pay on time, that can create problems for your cash flow.
Example
Imagine you run a catering business and you deliver food for a company party. You send the company an invoice for $2,500 and give it 30 days to pay. Until you receive the payment, that $2,500 is part of your AR.
What it tells you
AR focuses on managing the money you’re owed. It helps you stay organised, follow up on overdue invoices, and ensure your business has enough cash coming in when you need it.
How they’re different
AP is money going out – what your business owes others. AR is money coming in – what others owe your business. Both are equally important. Managing AP in an effective way keeps your suppliers happy and your business running smoothly. Managing AR effectively ensures you get paid for the work you’ve done. A successful business finds the right balance between the two to stay financially healthy.
Why are both accounts payable and accounts receivable important to track?
Tracking accounts payable and accounts receivable is important for maintaining control of your business. Here’s why they matter.
Why accounts payable matters
It protects your reputation
When you consistently pay your suppliers and vendors on time, you build trust. They’ll be more willing to offer you better terms, prioritise your orders, or give you the benefit of the doubt if you’re struggling. Paying late or not tracking what you owe can quickly damage these relationships.
It gives you breathing room
Managing AP properly means you can take advantage of credit terms. Instead of paying for everything immediately, you can spread out payments and keep more cash available for unexpected needs or opportunities.
It stops leakage
Missed payments can lead to late fees, lost discounts, or even legal trouble. Conversely, overpaying an invoice or double-paying because of bad tracking is the same as throwing money away. Carefully watching AP saves you from these costly mistakes.
Why accounts receivable matters
Cash in your pocket
Sales don’t mean much if you don’t get paid. Tracking AR clarifies who owes you money, how much, and when you can expect to be paid. If you don’t follow up, customers might not pay and your income won’t be realised.
It keeps the lights on
AR is your incoming cash. Without it, you can’t pay bills, your staff, or invest back into the business. If your customers don’t pay on time, you’ll feel that everywhere else in your operations.
It shows you who you can trust
By tracking AR, you’ll spot patterns in who pays on time and who doesn’t. That information can help you make smarter decisions about who to extend credit to in the future and how to avoid risky clients.
Why they work together
AP and AR are closely linked. If they’re not working in tandem, the business can face more challenges.
Example
If you’re not collecting AR, you won’t have enough cash to pay AP.
If you don’t manage AP, you might not prioritise payments properly. You might be left scrambling to cover expenses while waiting on overdue invoices.
By tracking both, you can do the following:
Plan ahead: You can know when the due dates of big invoices are coming and whether you’ll have the cash on hand to cover them.
Stay flexible: You can spot problems early on like a customer who’s late on payment or a vendor who might need you to pay sooner than expected.
Make smarter moves: Time your AP and AR to negotiate better payment terms, plan when to make purchases, and decide when to offer discounts for early payments.
The big picture
Tracking AP and AR is about knowing where your money is at any given time – what’s coming in, what’s going out, and how those pieces fit together.
How Stripe can help track accounts payable and receivable
In addition to being a payment processor, Stripe is a powerful tool that can simplify how businesses manage AP and AR. Here’s how it helps with both.
How Stripe helps with accounts receivable
Faster payments from customers
Stripe makes it easy for businesses to accept payments through multiple methods such as credit cards, Automated Clearing House (ACH) transfers, Apple Pay, and Google Pay. The simpler it is for customers to pay, the faster you can get your money.
Automated invoicing
Stripe’s invoicing tools let you generate and send professional, customisable invoices in minutes. They also track when an invoice is paid or overdue so you won’t need to track an invoice manually.
Easier recurring billing
For businesses with subscription models or ongoing services, Stripe automates recurring payments. You set the terms and Stripe facilitates timely collections without requiring you to chase customers.
Follow-ups and dunning management
Stripe can send automated reminders for overdue invoices, saving you from following up manually on late payments. For subscription services, it can also retry failed payments and notify customers about payment issues to reduce churn.
Real-time AR tracking
With the Stripe Dashboard, you can see exactly how much money you’re owed, which payments are pending, and when you can expect funds in your account. This real-time visibility helps you plan your cash flow.
How Stripe helps with accounts payable
Integrated payment systems for vendors
If you use Stripe to pay suppliers or contractors, it tracks these transactions alongside your incoming payments. This consolidated view helps you manage AP and AR in one place.
Simplified payouts
Stripe Connect lets you quickly and easily send payouts to vendors, freelancers, or marketplace partners. It also supports automatic scheduling so payments are sent on time.
Expense tracking
For businesses with vendor relationships that involve recurring charges (e.g., software subscriptions), Stripe can automatically record outgoing payments to help with AP tracking.
Detailed reporting
Stripe generates detailed reports on all outgoing and incoming transactions, making it easier to reconcile accounts and avoid missed or duplicate payments.
How Stripe bridges AP and AR
Cash flow insight
The Stripe Dashboard clarifies your financial flow – how much money is coming in and going out. This helps you anticipate potential cash flow gaps and plan accordingly.
Automation to reduce manual work
By automating invoice generation, payment collection, and vendor payouts, Stripe reduces the need for manual tracking. This can minimise errors and free up time so you can focus on bigger priorities.
Easy integrations
Stripe works with popular accounting tools such as QuickBooks, Xero, and NetSuite so you can automatically sync AP and AR data. This can ensure your financial records are accurate and up-to-date.
Global capabilities
Stripe supports numerous currencies and payment methods, making it easier for businesses that operate internationally to handle AP and AR across borders without needing to juggle multiple platforms.
What are common challenges in managing accounts payable and receivable?
Managing accounts payable and accounts receivable comes with its own complexities. Here are some challenges businesses face.
Challenges in managing accounts payable
Monitoring deadlines
When invoices accumulate, it’s easy to lose track of payment due dates – especially if you’re working with many suppliers. One late payment might not seem significant, but it can lead to late fees or hurt your relationship with a key supplier.
Paying too early or too late
Timing is everything. If you pay too early, you might drain your cash reserves before you need to. By paying too late, you could lose out on early payment discounts or lose suppliers’ trust.
Catching errors before they cost you
Invoices aren’t always perfect. Sometimes they contain overcharges, double charges, or even attempted fraud. If you don’t catch these issues before payments are sent, you could be throwing money away without much recourse for recovering those funds.
Managing relationships with vendors
Not all suppliers are created equal. Some are key to your operations while others are less so. Paying bills on time is important, but knowing who to prioritise – and how to keep those relationships strong – is also key.
Challenges in managing accounts receivable
Getting paid on time
Chasing late payments can be one of the most frustrating parts of running a business. Every day that a customer doesn’t pay is a day your cash flow decreases, which can create a ripple effect through your entire operation.
Handling disputes
Resolving invoice disputes takes time and energy that could be spent growing your business or on core operations.
Preventing bad debts
If you’re not careful about who you extend credit to, you could end up with unpaid invoices that you’ll never collect. Those bad debts hurt your profits, waste time, and strain resources.
Balancing follow-ups without hurting relationships
Following up on late payments can be awkward so it’s important to find the right tone and timing for reminders.
Challenges in balancing accounts payable and receivable
Mismatched payment timing
A common problem is timing. For instance, you might owe your suppliers in 30 days, but your customers aren’t paying you for 60. That mismatch can leave you scrambling to cover bills, even if your business is profitable.
Cash flow shortages
Everything might look fine on paper, but if payments from customers don’t arrive before your bills are due, that’s a problem.
Keeping everything organised
If you don’t track AP and AR well together, you might lose sight of the big picture. You might pay bills without realising you’re running low on cash or wait too long to follow up on overdue invoices because you’re busy resolving issues elsewhere.
Why these challenges matter
Mismanaging AP or AR can escalate into bigger problems. A missed supplier payment could disrupt your operations. A late-paying customer could leave you without cash to cover payroll.
What businesses can do
Focus on timing: Align your payment terms with suppliers and customers as much as possible to minimise gaps in cash flow. If your supplier gives you 30 days to pay, try to get your customers to pay you within the same time frame.
Get serious about follow-ups: Don’t let overdue invoices slide. Follow up regularly, firmly, and professionally. The sooner you act, the better your chances of collecting become.
Use tools, not guesswork: Spreadsheets can only take you so far. Invest in accounting software that tracks AP and AR in real time so you always know what’s coming in, what’s going out, and when.
Build a buffer: Keep a cash reserve for when timing issues occur. This safety net can save you from scrambling during a crunch.
Keep communication open: Whether you’re working with suppliers or customers, honest communication can solve a lot of problems before they escalate.
The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.