Accounts payable and accounts receivable 101: A guide for businesses

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  1. Introduction
  2. What are the differences between accounts receivable and accounts payable?
    1. What they represent
    2. Balance sheet classification
    3. Impact on transactions
    4. Normal balance
  3. Accounts payable best practices
    1. Improve account management
    2. Streamline your workflow
    3. Fine-tune your payments
    4. Boost accuracy and control
    5. Embrace technology
  4. Accounts receivable best practices
    1. Streamline invoicing and billing
    2. Improve receivables management
    3. Boost collections efficiency
    4. Build strong customer relationships
    5. Refine data and analytics
  5. How Stripe can help
    1. Accounts receivable features
    2. Accounts payable features

Accounts payable (AP) is the amount of money a business owes to its suppliers or creditors for goods or services purchased on credit. AP is recorded on a business’s balance sheet under current liabilities. Typically, accounts payable are short-term debts the business expects to pay within a year or within one operating cycle, whichever is longer.

Accounts receivable (AR), on the other hand, is the money owed to a business by its customers for goods or services delivered but not yet paid for. AR represents a line of credit extended by the business that is usually recoverable within a short period, such as 30, 60, or 90 days. On a business’s balance sheet, accounts receivable is listed as a current asset, indicating it is expected to be turned into cash within one fiscal year.

Below, we’ll explain the differences between accounts payable and accounts receivable—in what they are and how they’re handled—as well as the best practices, tools, and tips businesses can use to manage them. Here’s what you should know.

What’s in this article?

  • What are the differences between accounts receivable and accounts payable?
  • Accounts payable best practices
  • Accounts receivable best practices
  • How Stripe can help

What are the differences between accounts receivable and accounts payable?

Accounts receivable and accounts payable are important accounting concepts that often get confused, but they represent different parts of the accounting process. Here’s an explanation of their key differences:

What they represent

  • Accounts receivable: Money owed to your business by customers for goods or services they purchased on credit. You can think of it as money coming in.
  • Accounts payable: Money your business owes to suppliers or vendors for goods or services purchased on credit. This is money going out.

Balance sheet classification

  • Accounts receivable: Considered a current asset on your balance sheet because it’s expected to be converted into cash within a year.
  • Accounts payable: Considered a current liability on your balance sheet because it’s a short-term debt that must be settled within a year.

Impact on transactions

  • Accounts receivable: Increases when you make sales, and decreases when you collect payment in cash.
  • Accounts payable: Increases when you make purchases, and decreases when you make payments.

Normal balance

  • Accounts receivable: Normally has a debit balance.
  • Accounts payable: Normally has a credit balance.

For example, if your business was a restaurant and a customer ordered food but didn’t pay immediately, that amount would go into accounts receivable. However, if you bought ingredients from a supplier and didn’t pay for them right away, that amount would go into accounts payable.

Accounts payable best practices

When it comes to handling the accounts payable process, businesses can implement some best practices to ensure accuracy and efficiency. Here’s a rundown:

Improve account management

  • Automated solutions and digital transformation: Invest in AP automation software that offers features such as optical character recognition (OCR) for invoice processing, electronic workflow approvals, and automated three-way matching (invoice, purchase order, and receiving report). Implement machine learning algorithms to analyze historical payment data, predict optimal payment times, and identify patterns that could indicate errors or fraud.

  • Supplier relationship management: Conduct periodic performance reviews with key suppliers to assess their delivery timelines, quality of goods or services, and compliance with contract terms. Negotiate terms that might include extended payment periods, volume discounts, or improved service or pricing in exchange for prompt or up-front payments.

  • Dynamic discounting: Implement a sliding scale for dynamic discounts, where the discount rate varies based on how early the payment is made. Use AP software to automatically offer dynamic discounting options to suppliers based on predefined criteria such as invoice amount or supplier category.

  • Strong compliance and internal controls: Regularly update and test internal control procedures, including segregation of duties (different individuals for invoice approval, payment processing, and reconciliation). Confirm compliance with global financial regulations, such as maintaining appropriate documentation for audits and implementing Anti-Money Laundering (AML) checks.

  • Improving payment methods: Analyze the cost-benefit of different payment methods. For instance, ACH payments tend to be cheaper but slower, while wire transfers are faster but more expensive. Consider using corporate credit cards for smaller transactions to take advantage of cash-back or rewards programs.

  • Data analytics and reporting: Regularly generate reports on key AP metrics such as days payable outstanding (DPO), average processing time per invoice, and percentage of invoices processed without human intervention. Use trend analysis to identify seasonal variations in invoice volumes or payment cycles, and adjust staffing or payment strategies accordingly.

  • Cash flow management: Integrate AP data into the business’s wider financial system for a holistic view, allowing for better cash flow forecasting and working capital management. Explore financing or factoring options where appropriate to improve cash flow without negatively affecting supplier relationships.

Streamline your workflow

  • Automate invoice processing and data entry: Integrate OCR technology to convert different invoice formats into digital data, reducing manual entry. Deploy automatic data capture systems that can extract key invoice details such as vendor names, dates, and amounts, and input them into your financial system.

  • Centralize invoice approvals and payments: Implement a unified AP platform where all invoices can be uploaded, approved, and paid, eliminating scattered processes and streamlining workflow. Set up digital workflows for approval hierarchies, automatically routing invoices to the correct personnel for approval.

  • Go paperless: Transition to a fully digital invoice processing system, which saves physical storage space and makes retrieval and auditing of invoices much more efficient. Encourage vendors to send electronic invoices and establish an online system for invoice submission and tracking.

Fine-tune your payments

  • Implement early payment discounts: Negotiate with suppliers to offer discounts for payments you make before the due date. This can be a sliding scale based on the earliness of the payment. Automate the detection of early payment terms in the AP system to guarantee these discounts are always honored.

  • Negotiate extended payment terms: Work with suppliers to extend the payment period to improve your business’s cash flow. This could involve longer credit terms or installment-based payments. Incorporate these negotiated terms into your AP system for automatic compliance and scheduling.

  • Use virtual card payments: Use virtual cards for business-to-business (B2B) payments, which provide a secure, one-time-use number for each transaction, boosting security. In doing so, you’ll also benefit from rewards programs associated with virtual card usage, such as cash back or travel points.

Boost accuracy and control

  • Establish clear internal controls: Define specific roles and responsibilities within the AP department, including segregation of duties to prevent fraud. Implement an automated approval workflow that enforces these controls and tracks all invoice interactions for audit purposes.

  • Reconcile accounts payable records regularly: Regularly reconcile AP records with bank statements and general ledger entries to catch and correct any discrepancies promptly. Use reconciliation tools within your AP software to automate parts of this process.

  • Monitor key AP metrics: Closely watch metrics such as DPO, cost per invoice, and percentage of invoices processed electronically. Use these metrics to identify trends, benchmark performance, and identify areas for further optimization.

  • Train employees on proper AP procedures: Regularly train AP staff members to ensure they are proficient in using software and understand updated procedures and controls. Create a resource library with training materials and best practices documentation for reference.

Embrace technology

  • Invest in AP automation software: Choose software that provides comprehensive features such as electronic invoicing, automated workflows, and real-time reporting. Look for software that can work with your financial systems to create a unified financial management experience.

  • Use cloud-based platforms: Move your AP operations to a cloud-based platform to benefit from remote accessibility, improved security, and automatic updates. Select a cloud provider that offers data backup and disaster recovery capabilities.

  • Consider emerging technologies: Stay informed about new technologies in the AP space, such as artificial intelligence (AI) for intelligent invoice matching or blockchain for secure, transparent transactions. Consider pilot programs with new technologies to test their efficacy and impact on your AP processes before full-scale implementation.

Accounts receivable best practices

Ensuring your accounts receivable process runs smoothly can save your business time and avoid inaccurate financial reports. Here’s an overview of how to best manage accounts receivable:

Streamline invoicing and billing

  • Embrace digital solutions: Shift to e-invoicing platforms for more efficient invoice delivery, incorporating features such as automated data capture and OCR technology for reduced errors. Implement systems that work with sales and service platforms for real-time invoicing.

  • Improve invoice design: Design invoices for clarity, with prominent display of due dates and straightforward payment instructions. Use varied delivery channels (e.g., email and online portals) to match customer preferences and to guarantee immediate receipt.

  • Automate reminders and notifications: Schedule automated reminders via email or SMS as due dates near to minimize late payments. Analyze customer responses and adjust reminder strategies accordingly.

Improve receivables management

  • Segment customers strategically: Group customers based on payment history and creditworthiness, using data for precise segmentation. Tailor collection strategies and credit terms to each segment, reflecting their risk profile and value.

  • Offer early payment incentives: Implement sliding scale discounts or rewards for early payment, and automate this process in your AR system.

  • Implement flexible payment options: Accept a variety of payment methods, including online portals, credit cards, ACH transfers, and installment plans, integrating them into your AR system.

Boost collections efficiency

  • Prioritize accounts effectively: Focus initial collection efforts on high-value accounts with a history of late payments, using predictive analytics to guide prioritization. Remember to balance the need for collections with maintaining customer relationships.

  • Employ a graduated approach: Start with friendly reminders, escalating to more assertive measures as needed, while maintaining customer goodwill.

  • Use technology for automation: Implement automated payment plans and self-service portals for ease of payment. Explore AI and machine learning solutions for more sophisticated debt collection and customer interaction strategies.

Build strong customer relationships

  • Maintain open communication: Engage with customers proactively, especially those facing payment challenges, to find mutually beneficial solutions. Use customer relationship management (CRM) platforms to manage and document these interactions, crafting a personalized and informed strategy.

  • Provide transparent updates: Inform customers about their account status and any collection actions taken.

  • Reward loyal customers: Develop loyalty programs or special discounts for consistent and timely payments, and integrate these incentives into the AR strategy.

Refine data and analytics

  • Standardize customer data: Gather customer data across systems to facilitate efficient communication and data analysis, and use cloud-based solutions for centralized data management and accessibility.

  • Track key AR metrics: Monitor metrics such as days sales outstanding (DSO), collection success rates, and write-off percentages. Regularly report on these metrics to assess the effectiveness of AR strategies and make data-driven decisions.

  • Analyze customer behavior: Use data to conduct in-depth analysis of payment trends and customer behavior. Apply these insights to refine collection strategies, credit policies, and customer engagement.

How Stripe can help

Stripe Billing provides a comprehensive system for managing accounts receivable through easy invoicing, subscription management, and automated collections. Its reporting and analytics capabilities provide businesses with a detailed understanding of their financial operations. Though Stripe Billing has limited functionality for accounts payable, it integrates with accounting systems and automated reconciliation features to indirectly manage AP processes.

Here’s an overview of what Stripe Billing offers businesses:

Accounts receivable features

  • Invoicing: Stripe Billing lets businesses create and manage invoices for one-time payments directly from the Dashboard and customize and send Stripe-hosted invoices in minutes. The Invoicing application programming interface (API) and its advanced features can automate how you collect and reconcile payments, simplifying AR management.

  • Subscription management: For businesses with recurring billing models, Stripe Billing automates and manages subscriptions and one-time payments. This can include per-seat pricing, metered billing, and more, and it supports various recurring business models.

  • Accounts receivable automation: Stripe Billing provides features such as automatic reconciliation and collection, which ensures that invoices are paid and that those payments are properly accounted for in the business’s books.

  • Multicurrency support: Stripe allows adjustments to a customer’s billable currency, supporting multicurrency transactions and global invoicing, which is important for businesses operating internationally.

  • Data and reporting: With Stripe Billing, businesses can access software-as-a-service (SaaS) and billing analytics, including accounts receivable aging and structured query language (SQL)-based reporting. This data helps with tracking and managing AR effectively.

Accounts payable features

  • Financial connections and data integration: Stripe’s financial connections and integrations with accounting software can help reconcile accounts payable, making sure outgoing payments are accurately recorded and managed.

  • Automated reconciliation: The automated reconciliation feature can confirm payments made match the recorded transactions, a key aspect of AP management.

  • Payment processing: Businesses can make payments to vendors or service providers using a variety of payment methods offered by Stripe, including ACH and card payments.

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 attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.

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