What is Accounts Payable?

Accounts payable (AP or A/P) is money your business owes to suppliers, vendors, or creditors for goods or services received but not yet paid for. On your balance sheet, accounts payable is a current liability — an obligation you must pay in the near term, typically within 30-90 days.

How Accounts Payable Works

When a supplier extends credit to your business (allowing you to pay later rather than immediately), you create accounts payable:

• Goods or services received: You receive inventory, supplies, or services from a vendor
• Invoice received: The vendor sends you a bill with payment terms
• Payable recorded: The invoice amount becomes accounts payable on your books
• Payment made: When you pay, AP decreases and cash decreases

Accounts Payable and Cash Flow

Accounts payable represents free short-term financing from your suppliers. The longer your payment terms, the longer you can use that cash for other purposes.

Managing Accounts Payable

Strategic AP management balances cash flow benefits against supplier relationships:

• Pay on time, not early: Unless early payment discounts (like 2/10 Net 30) make financial sense, use the full payment term
• Negotiate terms: As your relationship grows, ask for extended payment terms (Net 45 instead of Net 30)
• Track due dates: Avoid late fees and maintain good supplier relationships by paying before due dates
• Prioritize strategically: If cash is tight, prioritize payments to critical suppliers

Early Payment Discounts

Some suppliers offer discounts for early payment. "2/10 Net 30" means you get a 2% discount if you pay within 10 days; otherwise, the full amount is due in 30 days.

This 2% for 20 extra days equates to roughly 36% annualized. If you have the cash available, taking early payment discounts is often worthwhile.

AP and Loan Applications

Lenders analyze your accounts payable to understand your payment habits and short-term obligations:

• High or growing AP may indicate cash flow stress
• Consistently late payments suggest management or cash problems
• Very low AP relative to purchases may mean you are paying too quickly and not optimizing cash flow
• The ratio of AP to receivables shows your cash conversion efficiency