AP is what you owe. AR is what you're owed. Understanding both — and the gap between them — is the foundation of cash flow management for any business.
Accounts Payable (AP) is the money your business owes to suppliers and vendors for purchases made on credit — it is a liability (current liability on your balance sheet). Accounts Receivable (AR) is the money customers owe your business for products or services you've already delivered — it is an asset (current asset on your balance sheet). The gap between the two is a key driver of your cash flow position. When AR is high and AP comes due before you collect, many businesses turn to invoice factoring or working capital financing to bridge the gap.
These two accounts represent opposite sides of the same transaction in a B2B context. When your supplier extends you credit (allowing you to buy now and pay later), your business records accounts payable. When you extend credit to your customers (allowing them to buy now and pay later), you record accounts receivable.
Accounts payable represents short-term obligations your business owes to vendors, suppliers, and creditors for goods or services already received. It is recorded when an invoice arrives — before it is paid.
When your business purchases $10,000 in inventory on net-30 terms, your accounting system records:
When you pay the invoice 30 days later:
Smart AP management is about maximizing your cash position without damaging supplier relationships. The goal is to pay on the last acceptable day — not early (unless an early payment discount outweighs the cost of capital) and not late (which risks late fees, strained relationships, and credit holds).
Days Payable Outstanding (DPO) measures how long on average your business takes to pay its bills: DPO = (AP / Cost of Goods Sold) x 365. A higher DPO means you're holding onto cash longer — which is generally beneficial to cash flow but must be balanced against supplier terms.
Accounts receivable represents money that customers legally owe your business for goods delivered or services completed but not yet paid for. It is recorded as an asset when the sale occurs on credit terms.
When your business sells $15,000 of services on net-45 terms:
When the customer pays 45 days later:
Days Sales Outstanding (DSO) measures how quickly you're collecting: DSO = (AR / Net Credit Sales) x 365. A lower DSO means faster collections. Industry benchmarks vary, but a DSO above 60 days in most industries indicates a collection problem that's straining cash flow.
Best practices for managing AR:
| Statement | Accounts Payable | Accounts Receivable |
|---|---|---|
| Balance Sheet | Current Liabilities section | Current Assets section |
| Cash Flow (indirect) | Increase = added to net income; Decrease = subtracted | Increase = subtracted from net income; Decrease = added |
| Income Statement | Does not appear directly | Does not appear directly |
On the indirect method cash flow statement, changes in AP and AR appear in the operating activities section as adjustments to net income:
This is why a profitable company can still have negative operating cash flow — if revenue is growing fast and AR is piling up uncollected, cash lags behind accounting income.
Learn to read and interpret cash flow statements in our guide: How to Read a Cash Flow Statement.
The gap between when you owe money (AP) and when you collect money (AR) is one of the most common reasons businesses turn to short-term financing. This gap — sometimes called the cash conversion cycle — can create real liquidity problems even for healthy, profitable businesses.
A construction subcontractor completes a $200,000 project in January. Their supplier invoice for materials ($80,000) is due February 15. The general contractor pays on net-60 terms — meaning the $200,000 won't arrive until late March. The business has $200,000 in AR but needs $80,000 in cash in the next few weeks.
This is exactly the scenario that invoice factoring, working capital loans, and lines of credit are designed to solve — not because the business is failing, but because timing of cash flows doesn't match obligations.
Understand how working capital is calculated and why it's the key measure of your business's short-term financial health.
| Metric | Formula | What It Tells You |
|---|---|---|
| Days Sales Outstanding (DSO) | (AR / Net Credit Sales) x 365 | Average days to collect from customers |
| Days Payable Outstanding (DPO) | (AP / COGS) x 365 | Average days to pay your suppliers |
| AR Turnover | Net Credit Sales / Avg AR | How many times AR cycles per year |
| AP Turnover | Total Purchases / Avg AP | How many times AP cycles per year |
| Cash Conversion Cycle | DSO + DIO - DPO | Days from cash out to cash in |
The cash conversion cycle (CCC) is the most comprehensive measure. A CCC of 30 days means on average, 30 days pass between when you spend cash on inventory/labor and when you collect cash from customers. Shortening the CCC — by collecting AR faster, extending DPO, or reducing inventory days — directly improves cash flow.
Retailers often have low AR (customers pay at point of sale) but significant AP to suppliers. The focus is on DPO management — maximizing cash held while honoring supplier terms.
Service businesses typically have high AR and minimal inventory. Managing DSO is critical — slow-paying clients can significantly impact cash flow even when revenue is strong.
Among the most challenging AP/AR environments. Progress billing, retainage (withholding 5–10% until project completion), and long payment cycles from general contractors can create severe cash gaps.
Manufacturers carry both large AP (raw materials) and large AR (finished goods shipped on credit). The entire cash conversion cycle — from buying materials through production and to customer collection — can span months.
See all invoice factoring options from Merchant Fund Express — get paid on your outstanding invoices immediately instead of waiting on customer payment terms.
Review our business expense categories guide to understand how AP, AR, and other financial concepts interact with your tax obligations.
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Apply Now (305) 384-8391Accounts payable (AP) is money your business owes to suppliers and vendors for goods or services received but not yet paid for — it is a liability on your balance sheet. Accounts receivable (AR) is money owed to your business by customers for goods or services delivered but not yet collected — it is an asset on your balance sheet.
Accounts payable is recorded as a credit when the liability is created (you owe money) and a debit when the bill is paid (the liability is reduced). On your balance sheet, AP appears as a credit balance under current liabilities.
Accounts receivable is a current asset on your balance sheet. It represents money that customers legally owe your business and is expected to be collected within a short period (typically 30–90 days).
High accounts receivable means you've earned revenue but haven't collected cash yet — this creates a cash flow gap. If your AR grows faster than your AP obligations, you may need bridge financing (like invoice factoring or a line of credit) to cover operating expenses while waiting for customer payments.
AR turnover = Net Credit Sales / Average Accounts Receivable. A higher ratio means you're collecting receivables quickly. The inverse (365 / AR turnover) gives you Days Sales Outstanding (DSO) — the average number of days it takes to collect payment. A DSO under 45 days is generally considered healthy.
AP turnover = Total Supplier Purchases / Average Accounts Payable. A lower ratio (meaning you take longer to pay) may indicate cash flow management efficiency — but paying too slowly can damage supplier relationships. Days Payable Outstanding (DPO) = 365 / AP turnover.
Yes. Invoice factoring and accounts receivable financing allow you to monetize outstanding invoices immediately. You sell your AR to a factoring company (or use it as collateral) at a small discount in exchange for immediate cash — eliminating the wait for customers to pay.
Under the indirect method, an increase in accounts payable is added back to net income in the operating activities section (cash is being conserved by not paying bills yet). A decrease in AP is subtracted (cash is being used to pay down obligations).
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