Accounts Payable (A/P)

Accounts Payable (A/P) is the balance-sheet liability tracking money a company owes vendors for goods or services received but not yet paid for. It's recorded as a current liability because the company has an obligation to pay, with payment timing managed strategically to balance cash flow against vendor relationships. A/P is the mirror image of A/R: where A/R is what customers owe the company, A/P is what the company owes others.

The basic mechanics:

Company receives an invoice from a software vendor for $10K with Net-30 terms. On the day of receipt:

• Income statement: $10K expense (recognized in the period the service was delivered).
• Balance sheet: A/P +$10K (liability).
• Cash: no change yet.

30 days later, company pays:

• Balance sheet: A/P -$10K, Cash -$10K.

The A/P timing strategy:

Companies actively manage A/P timing to preserve cash:

Pay-on-due-date strategy (most common): pay invoices exactly on the due date, not before. Preserves cash for ~30 days.

Early-payment-discount capture: some vendors offer 2-3% discounts for paying within 10 days (Net-10 2/10). Worth taking if the discount rate beats the company's cost of capital.

Stretch-the-payable strategy (risky): pay invoices 5-15 days late. Common in cash-strapped companies but damages vendor relationships and can result in vendors switching to prepay/COD terms.

Auto-pay: increasingly common for routine vendor payments (software subscriptions, utilities), reduces admin overhead but loses the timing optimization.

The A/P aging report:

Similar to A/R aging:

Aging bucket	Typical healthy %
Current (not yet due)	60-80%
1-30 days past due	10-25%
31-60 days past due	2-5%
61+ days past due	1-3%

Heavy concentration in past-due buckets signals cash flow problems.

Key A/P metrics:

Days Payable Outstanding (DPO): average days from invoice receipt to payment. Higher DPO preserves cash longer (within reasonable limits).

A/P turnover: how many times A/P "turns over" per year. Inverse of DPO.

Past-due rate: percentage of A/P past due. Should be near zero in healthy companies.

A/P vs cash flow:

A/P can be a meaningful cash source:

Growing A/P (paying slower): adds to cash position. Common in cash-strapped or growing companies.

Shrinking A/P (paying faster): drains cash position. Can happen when vendors tighten terms.

Stable A/P relative to revenue: signals consistent payment practices.

Acquirers and lenders watch A/P trends carefully:

• A/P growing faster than revenue can signal cash flow problems.
• Vendor concentration in A/P (one vendor representing huge portion) is concerning.
• Recurring past-due A/P suggests operational issues.

A/P best practices:

Three-way match: invoice + purchase order + receiving document must align before payment. Catches fraud and errors.

Approval workflows: clear policies on who can approve what level of expense and payment.

Vendor management: consolidate vendors where possible; negotiate Net-45 or Net-60 terms for larger relationships.

Early-payment discount capture: take 2/10 Net-30 discounts when offered; the implied annual rate beats most cost of capital.

Monthly A/P review: identify any anomalies (unexpected vendors, growing past-due, unusual amounts).

What founders get wrong: Paying invoices the day they arrive rather than on the due date, losing the timing optimization that preserves cash. Or, on the other extreme, stretching payables past due dates and damaging vendor relationships. The right discipline: pay-on-due-date as default, capture discounts when math favors, never pay late.

Related: Accounts Receivable · Cash Flow · Working Capital · Balance Sheet · Cash Conversion Cycle

FAQ

What is Accounts Payable (A/P)?
Money a company owes vendors and suppliers for goods or services received but not yet paid for. Recorded as a current liability on the balance sheet.

What's the difference between A/P and A/R?
A/R is money customers owe the company (asset). A/P is money the company owes vendors (liability). Mirror images of each other.

Should I pay invoices early or on the due date?
Default to paying on the due date (preserves cash). Pay early only if there's a meaningful early-payment discount (e.g., 2/10 Net-30 implies a ~36% annual rate, worth capturing if cost of capital is below that).

What's a healthy A/P aging distribution?
Current (not yet due): 60-80%. 1-30 days past due: 10-25%. Anything past 30 days due should be minimal (under 5%). Past-due A/P damages vendor relationships and signals cash flow problems.