One of the questions we frequently receive is: How does my accounts payable affect cash flow in the short, medium and long term?
Financial health is important to any business. There are certain aspects that cannot be neglected. Accounts Payable is one of them. If you are not on top of your accounts payable and how it affect cash flow, severe consequences can result. Some of these issues could be:
If you do not know what you need to pay and when to pay it, chances are you will not pay your bills on time. When this occurs, your bills will become delinquent and you will lose credibility as a business owner and lessen your chances of acquiring a loan should you need it.
Accounts payable tracks your lines of credit to vendors for supplies and services. Neglecting to keep this on track and getting too many lines of credit due on a monthly basis will keep your cash flow tied up. These can be purchase orders, invoices, contracts and other reports dealing with owing money. Needless to say: accounts payable affect cash flow directly.
Your inventory will suffer when you don’t have the ability to acquire goods you need due to a negative cash flow as a result of outstanding bills.
When situations like this occur in your accounts payable, your cash flow is severely affected. Why?
The accounts payable line item usually has a credit balance based on the invoices being recorded. Accounts Payable gives you a running account of the amount of money you owe to your creditors. As long as you have money owed, it decreases your cash flow. Accounts Payable is considered a liability. As you acquire credit, payments on a recurring basis reduce your cash flow significantly. If you do not have a good handle on this and keep opening new accounts, your monthly expenditures will use up all the working capital you may have.
The accounts payable spreadsheet is one of the most important documents you can have to see a real-time snapshot of where your money is going. Any good business owner will know the intricacies of the accounts payable spreadsheet thoroughly, even if you have an accountant or bookkeeper on hand. Being able to understand how things work and how your cash flow will be affected is a major responsibility of a business owner. Debits and credits should be familiar financial jargon to keep your books in order and running smoothly.
Taking the time to understand how accounts payable works and how it can affect your cash flow will be beneficial to the longevity of your business. Taking a class or tutorial to become better acquainted with the system will be well worth the time and effort.
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