Josh Aharonoff, CPA
Josh Aharonoff, CPA is an Influencer
Fractional CFO | 300k+ Finance & Accounting Audience | Founder & CEO of Mighty Digits
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Accounts Payable vs Accounts Receivable2 BIG areas of Finance & Accounting…and many organizations have entire departments dedicated to these 2 functions.They are the yin and yang of the money you OWE and the money you’re OWEDEach have their own quirks, and ways to analyzeLet’s get into it➡️ What do they mean?Accounts Payable → Money you owe to suppliers for goods or services purchasedAccounts Receivable → Money customers owe you for sales generated but not yet paid➡️ Where do they show up on your financial statements?They are both part of your working capital, and appear on your balance sheetAccounts Payable → Current LiabilitiesAccounts Receivable → Current AssetsThe movements in these accounts get shown on your statement of cash flows in your Cash from Operating Activities➡️ What are the journal entries?Accounts payable → Goes up with a credit, and down with a debitAccounts receivable → Goes up with a debit, down with a credit➡️ Why are they important?These 2 accounts can cause wild swings in your cash flowsAccounts Payable → the more favorable your credit terms with suppliers, the stronger your cash positionAccounts Receivable → the quicker you collect your cash, the less bad debt, and the more favorable your cash position➡️ What are some formulas around these?1️⃣ Accounts Payable Formulas:Accounts Payable Turnover → this measures how many times a company pays off its accounts payable balance in a specific periodFormula = Purchases on credit / avg accounts PayableDays Payable Outstanding (DPO) → Represents the average number of days it takes a company to pay its suppliersFormula = Accounts Payable / Purchases on Credit * number of days2️⃣ Accounts Receivable Formulas:Accounts Receivable Turnover →this measures how many times a company can convert its accounts receivable balance into cash in a given periodFormula = Net Credit Sales / Avg AR balanceDays Sales Outstanding (DSO) → this measures how long it takes on average to collect again your receivablesFormula = Accounts Receivable / Net Credit Sales * Number of DaysBad Debt Expense ratio → This show you how much you can expect to have in bad debt for each dollar in ARFormula = Bad debt expense / Total Credit Sales===That’s my take on AP & ARGot anything to add?Let us know by joining in on the discussion in the comments below
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AHMED IDREES CPA ,CMA, MBA
VP Finance I Financial Manager
3mo
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You made it simple and crystal clear.The next step is to add other AP and Other AR . The concept is the same but they might not be counted on ratios.
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Aleksandar Stojanović, MSc.
Scaling Tech Startups & SME’s with ARR $1M-$50M | $300K+ in Client Savings | Keynote Speaker | 1:1 Coaching | Fractional CFO
3mo
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Josh, I’d might add the impact of technology in managing AP & AR efficiently. Today, automation tools and AI can significantly streamline these processes, reduce errors, and improve efficiency.
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Tariq Munir
Speaker | Digital Transformation | Finance Transformation | Process Optimization
3mo
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Such an important and critical concepts explained so simply Josh! Thanks for spreading the financial acumen!Especially it is so important to keep an eye on how much sales are stuck in AR. Compy might be posting staggering revenue growth but a majority being stuck in AR will make it cash dry.
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Philip Handke, CFA
Excel & Power BI Training for Finance Professionals ➡️ Join our newsletter or attend a free webinar
3mo
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This is a crucial concept for finance professionals to learn. This one was confusing for me when I started because there’s no cash out the door at the start. You explain this well here - thanks for sharing 👍🏻
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Tom Griffiths
Financial guidance for small business owners | £8m+ added in profits to my clients' businesses | Fractional CFO
3mo
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goal to avoid cashflow issues: make days payables outstanding > days sales outstanding
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Rohidas Shet Talaulikar
Passionate about accounts, finance, business, and investments.
2mo
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It's very crucial for business owners and managers to understand about AR and AP to ensure that business is generating cash and not just showing profit.
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Amit Kumar
Fractional CFO & Founder | Leveraging AI for Advanced FP&A Strategies | Driving Business Growth with Smart Finance Solutions | Innovator in Tech-Driven Financial Leadership
3mo
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Indeed Josh Aharonoff, CPA, Accounts Payable is money you owe, like bills. Accounts Receivable is money others owe you. They affect your cash flow.
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Erny Mariana Azizan
Patience in Pursuit of the Right Opportunity | To learn faster have fun
3mo
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Sure, I'd be happy to hear you take on AP (Accounts Payable) and AR (Accounts Receivable).
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Good AP & AR teams are the best way to connect a finance department with the business, Josh. Finance business partnering is important as well, but through your AP and AR teams you really find out what happens in a company!
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Gaurav Baid, CPA, CA
Balancing Books and Breaking Barriers | CEO at VOCS | Accounting/Legal Outsourcing | AUS, NZ, North America, Middle East, India | CPA (US) | CA (India)
3mo
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Thanks for breaking down the essentials of Accounts Payable and Accounts Receivable, Josh Aharonoff, CPA I wish someone would have really taught us this in the uni.
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