Understanding the difference between Accounts Payable and Accounts Receivable

Before going into the difference between Accounts Payable (AP) and Accounts Receivable (AR) it will be relevant to look at what these accounting heads actually reflect.

Accounts Payable and Accounts Receivable

  • Accounts Payable – It is actually the amount that a company has to pay its vendors and suppliers for goods and services received. It is therefore treated as a liability in the books of accounts. Once payment is made, the liability is converted to expenses. Since the goods have been taken on credit for a certain period a track has to be kept of the contracted due date of payment. Large companies have thousands of such payable items and this is one reason why they prefer to outsource Accounts Payable Services. Missing a payment deadline by oversight or poor monitoring can tarnish the market reputation of the company.

  • Accounts Receivable – As the name suggests, it is amounts to be received by the company against goods and services given on credit and is therefore treated as an asset in the books of accounts. After a payment is received it is treated as an income. The company has to closely monitor the inflow of funds as payment defaults will put a stress on the cash flow and working capital requirements. This is also why firms prefer to outsource Accounts Receivable Services to specialist agencies that have the capability to recover even stubborn and long outstanding debts.

How do accounts payable and accounts receivable have a direct bearing on the health of a company?

AR is broken up by the average number of days to collect payment and DSO (Daily Sales Outstanding) is a ratio of AR to Average Sales per day.

AP is analyzed by the average time to make payment for an invoice and DPO (Daily Payment Outstanding) is a ratio of AP to the daily average of purchases or cost of goods sold per day.

Uninterrupted inflow of working capital can therefore be guaranteed by lowering DSO or hiking DPO. This is possible by outsourcing Accounts Payable Services and Accounts Receivable Services to firms that can maximize receipts and payments and keep DSO at a healthy 45 days.

What do these services have to offer-

  • Accounts Payable Services – The components of these services consist primarily of data capture that includes document storage and indexing and audit and reconciliation of invoices, electronic invoice and data processing, and incorporating mechanisms that eliminate the possibility of duplicate payments. Finally, payments too are monitored to ensure accuracy and to minimize floating costs of customers.

  • Accounts Receivable Services – By outsourcing this aspect a company stands to benefit in a number of ways. First, there is a steady recovery of receivables and cash flow and reduction of any stubborn or sticky debts. Highly experienced recovery teams help to recoup even old debts. Clients get consolidated reports and are therefore constantly in the loop on the financial position of the firm. Finally the state of the level of receivables collected and outstanding can be accessed any time from a common browser.

Hence, these are key factors in optimizing a stable financial position of a company and are therefore best outsourced.

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