The mirror image of accounts receivable - money you owe vendors. Managed well, AP is effectively interest-free short-term financing. Managed badly, it damages vendor relationships and ultimately costs more.
Definition
Accounts Payable (AP) - money the business owes vendors and suppliers for goods or services already received but not yet paid for. Sits on the balance sheet as a current liability.
Common uses
- Cash flow forecasting - scheduled AP payments are the cash-out side of the forecast
- Vendor relationship management - paying on time builds credit; paying late costs it
- Working capital strategy - longer DPO means more cash in operations
Watch out
Stretching payables beyond agreed terms damages vendor relationships and often results in vendors raising prices, requiring upfront payment, or refusing future business. Negotiate longer terms; don't take them by paying late.