Accounts receivable vs accounts payable: what’s the difference?

You can only manage your finances effectively if you know certain numbers and, as we all know, credit control leads to consistent cash flow which is vital for business success.

To help you manage your financial processes more effectively, here are two numbers that you need to know: accounts receivable and accounts payable.

What are accounts receivables?

Also known as AR, your accounts receivable refers to all outstanding invoices that have been sent to clients but are yet to be paid. In simpler terms, this number is the money owed to your business.

Whether it is overdue invoices or lines of credit, all of your receivables are classified as a current asset. Why? Because they should all be turned into cash within 12 months.

If you are having trouble recovering your accounts receivables click here for some extra tips.

What are accounts payable?

As you can probably guess, your accounts payable is the opposite of your receivable. This is a record of all outstanding invoices that have been sent to you by your suppliers or creditors. To put it simply, this number is the money your business owes.

Inversely to your receivables, your payables are classified as a current liability.

Why is it important to know these numbers?

To be successful, every business owner needs to know how much money is coming into the business and how much money is going out. And that’s exactly what payables and receivables are.

  • Accounts receivable = money owed to your business (ASSET)
  • Accounts payable = money you owe (LIABILITY)

These make up the foundation of accounting as once you know these numbers, you can start to implement effective credit control processes to build a consistent cash flow.

By hiring an accountant, you can always be reassured that you’re filing on time and that your taxes are correct. You can have peace of mind that you won’t get a surprise letter from HMRC and you don’t even have to deal with them at all if you don’t want to.

Start managing your finances effectively

When it comes to your credit control processes, consider digital accounting software and a digital payment process. This will help you to get paid quicker and on time, and it will allow you to get an overview of your finances in real-time.

With reports regarding your payables and receivables, you can make sound business decisions whilst managing any financial risks. The result? A successful business with a healthy cash flow!

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