Accounts Payable Cash Flow

Accounts payable has a direct impact on your business cash flow and is an important element of your procure-to-pay process. Because purchases made using credit are not paid for immediately, a high accounts payable balance equates to a positive cash flow. That is because accounts payable cash has not yet been spent. Until the actual invoices have been paid and accounts payable increased, that cash remains in your company’s account. Likewise, once those payments are made, the business’s accounts payable will decrease, resulting in a negative cash flow.

A savvy AP team can make use of a company’s accounts payable balance to maximize cash on hand. That’s an important task, because an organization’s cash flow metrics help to determine whether it has enough liquidity to meet its financial obligations. A positive cash flow is essential for long-term funding of operations, future growth, and overall financial stability.

How does accounts receivable impact cash flow?

On the other side of the cash flow equation we have accounts receivable (AR). The supplier’s accounts receivable team sets standards for how long the purchaser has until payment is due. A supplier can record short-term credits extended to their purchasers as current assets on their balance sheet. A purchaser’s AP team and a vendor’s AR team will often work together to determine a mutually beneficial payment schedule that allows both parties to maintain a desirable cash balance.

What is the difference between an income statement and a cash flow statement?

An organization’s income statement and cash flow statement are two different things, and accounts payable is handled differently in each. An income statement treats AP as a negative balance that signifies a loss of revenue. A statement of cash flows, on the other hand, regards AP as a positive balance, because the actual cash remains in your organization’s accounts until the purchase has been paid for.

Money reported on the cash flow statement represents the funds that your business has on hand at a specific time and is therefore more relevant to your short-term operations. An income statement is an example of accrual accounting — an accounting method that lets an organization record its expenses and revenues before any payment for goods or services has been received or issued.

Accrual accounting is very important for long-term planning and profitability, but a cash flow statement is equally important as an example of cash accounting. Cash accounting reflects how much cash is available at a particular time for important considerations such as paying for utilities and meeting the employee payroll. This is essential for keeping a business operational in the short-term while also planning for the long-term.

How to calculate accounts payable cash flow

Calculating your AP cash flow is a fairly simple equation. Start with the net income as recorded in your income statement, and then add or subtract the actual cash your business spent or received over a specific time frame.

For example, a manufacturing business might order $3,000 worth of machine parts from a supplier, with an agreement to pay the invoice within two months. Until that invoice has been paid, it is recorded as a loss of $3,000 on your income statement. Supposing your company had an income of $100,000 for the quarter, you would subtract the accounts payable of $3,000 to arrive at an income of $97,000.

That total of $97,000 is where your company’s cash flow statement begins. Until the invoice for the machine parts has been paid, that $3,000 is still cash on hand for your business. That means you can add a positive entry of $3,000 to the initial $97,000, bringing your cash flow statement up to $100,000.

How to record accounts payable in your cash flow statement

Keeping accurate and up-to-date financial records is a vital piece of tracking and managing your organization’s cash flow. Generally speaking, the data reported on the cash flow statement will be broken out into three categories:

• Operating activities – The operating activities section includes all revenue and expenses generated by a business delivering its regular goods or services.
• Investing activities – The investing activities section includes cash purchases and sales generated by property sales (real estate, equipment, vehicles) or non-physical property such as permits and patents.
• Financing activities – The financing activities section includes cash flow generated by debt financing, equity financing, or both.

Making a careful review of your business’s cash flow statement allows your accounts payable team to assess how much cash is generated by a variety of business activities. Analyzing the resulting financial statement is an essential part of making important long-term and short-term decisions for your business.

The goal for nearly any organization should be for the amount of cash generated by its operating activities to exceed the business’s net income. A higher cash flow can generally be taken as an indicator of an organization’s overall stability, financial solvency, and potential for growth. It is important to remember, though, that a strong cash flow statement in itself does not necessarily indicate a booming business. The cash flow statement should be considered along with the organization’s income statement and balance sheet in order to get a wider picture of the business’s financial situation.

How can an automated software solution help with AP cash flow?

Being able to closely monitor and predict cash flow is an essential part of any organization’s financial well-being. In the not too distant past, tracking your business’s cash flow was a time-consuming and complicated task for an accounts payable team.

Manually recording assets and liabilities on the cash flow statement, coordinating income statements with cash flow statements, and making financial adjustments as needed creates a great deal of tedious and repetitive work for an AP department. Relying on manual processes also greatly increases the risk of human errors that can lead to inaccurate cash flow projections. Especially for businesses that are growing rapidly or in industries experiencing volatility, being unable to get an accurate read on your company cash flow can have catastrophic consequences.

Automating your AP and invoice processing systems is the surest way for your business to stay on top of cash flow management. Not only can an automated software solution calculate cash flow accurately and consistently, it also eliminates much of the risk of human error and generates reports that make data analysis much easier.

That saves time and effort for your AP team, helps you make more accurate financial forecasts, and allows you to improve your relationships with valuable suppliers. All of those elements contribute to a clearer picture of your organization’s financial landscape and inform important decisions about everything from staffing levels to expansion to preferred vendors.

Ready to learn how MHC software solutions can help your AP team manage cash flow more effectively, eliminate avoidable human errors, and gain more visibility into the processes that drive your accounts payable efforts? Contact us today to schedule a demonstration!