Accounts Receivable vs. Accounts Payable: What’s the Difference?

To those who don’t live and breathe numbers, what goes on in your company’s accounting department can seem a bit mysterious. But really, every professional should have some idea of how a business’s finances are managed. There’s no better way to get insight into how cash inflows/outflows affect business strategies, marketing outreach, and growth opportunities.

Here are some basic processes that go into business accounting, focusing on two departments: accounts receivable (A/R) and accounts payable (A/P).

What Is Accounts Receivable?

A company’s accounts receivable process involves the total amount of money owed from clients for services/goods sold. These are payments that haven’t been paid, usually acting as lines of credit until the client officially receives an invoice and transmits the payment. Time periods for A/R payments most commonly range from several weeks to several months, though many companies create personalized collection payment schedules to accommodate their clients’ needs. In the A/R department, collections specialists are the ones in charge of tracking payments from clients. 

What Is Accounts Payable?

The A/P balance refers to the money owed by a company to its creditors, suppliers, or vendors. This is considered a current liability on the company’s balance sheet and represents capital that will need to be paid to continue business operations.

What’s the Difference Between Accounts Receivable vs. Accounts Payable?

The key difference between accounts payable and accounts receivable is that A/P is money your business owes, and A/R is money that’s owed your business. As a rule of thumb, remember: “Receivables” denote money you’ll be receiving, while “payables” describe money you’re paying. It’s that simple.

Every business transaction made will have an A/R and A/P component, so it helps to be familiar with these processes and what common issues you may experience managing them.

Want to improve your DSO?

Download this eBook to understand how to enhance your collections process with automation

Download Now

Common Problems With A/R and A/P

On both sides of the equation, teams are likely to experience a couple of recurring problems as they manage these accounting processes.

Late Payments

For A/R, specially for collections teams, late or overdue payments can create cash flow problems, untenable days sales outstanding (DSO) rates, and a need for substantial manual effort to “chase” customers with Dunning emails.

When invoicing accounts payable, late payments are an internal issue that may create bigger issues down the line. Capital and cash flow are obvious concerns, as late payments may result in additional fees or reputation damage among your vendors.

Manual Follow-Ups

A/P departments as well as A/R collections will need to follow-up with clients at some point. It’s a tedious process that requires substantial inputs of employee time.

This is especially true when the company lacks accounts billable and accounts receivable automation solutions. Without a way to streamline follow-ups and reporting, companies tend to get stuck with slow paper processes and outdated Excel management to keep tabs on payment dates/terms.

No accounting department is immune to these problems, but fortunately, new solutions for accounting automation can minimize their problematic impacts.

The Solution: Accounting Automation Platforms

These problems can be summarized quite simply: Poor collection rates create cash flow issues and require excessive employee time to manage. Fortunately, these issues can be easily solved through the strategic use of automation.

With automated A/R collection tools like Gaviti, companies gain new ways to manage key accounting processes:

• Better insights into financial trends through detailed knowledge bases and algorithms that continuously measure processes and updates
• Easier forecasting accounts payable and receivable, as all customer information, payment histories, and unique business details are aggregated and available in a single system
• Faster, more timely invoicing with automated invoice generation and follow-ups, guaranteeing that all communications go out exactly when they should
• More accurate invoicing through tools that automatically enter data and generate reports, reducing the risk of human-related errors

With all these benefits, you might think such platforms are hard to set up. Here’s the best part: No IT knowledge is required to set up and manage these solutions.

Gaviti’s automation platform is designed to be user-friendly and simple to operate, helping companies of all sizes and technical proficiencies leverage accounts receivable automation benefits for themselves.

Take a deep dive into your collections processes with Gaviti. Contact us and book your demo today!

See why Gaviti is ranked as the #1 Credit & Collections Software on G2: