What are Accounts Payable vs. Receivable best practices?
Organizations must maintain control over accounts payable and accounts receivable best practices to build a healthy and profitable business. Accounts payable refers to the money an organization owes, while accounts receivable is the money owed to the company.
Both AP and AR are crucial to the overall success of any operation. From timely production to increasing annual profits, the monies coming in and out of the business require constant monitoring. Discover the role automation plays in streamlining operations and maintaining accounts payable and accounts receivable best practices.
Understanding the difference between
AP and AR
|
Accounts Payable (AP) Money your company owes to suppliers or vendors |
Accounts Receivable (AR) Money owed to your company by customers |
|
| Cash Flow Direction | Outflow (you pay) | Inflow (you receive) |
| Example | Paying a vendor invoice | Sending an invoice to a customer |
| Main Objective | Ensure timely and accurate payments | Ensure timely and complete collections |
| Department Role | Process incoming invoices and manage vendor payments | Issue customer invoices and manage collections |
| Impact | Controls company’s liabilities and impacts vendor trust | Drives company’s revenue and impacts cash flow |
Accounts Payable (AP) best practices
Process vendor invoices promptly to avoid late fees and take advantage of early payment discounts. Delays in invoice processing can damage supplier relationships and lead to unnecessary expenses. Prioritizing prompt processing also enables companies to capitalize on early payment incentives that directly improve cash flow.
Implement AP automation tools to reduce manual entry, speed up approvals, and minimize errors. Automation also helps create a standardized and scalable process, reducing the burden on AP staff and ensuring consistency across high invoice volumes.
Use checks and balances such as dual approvals, audit trails, and user access restrictions to prevent fraud and ensure data integrity. Controls also help maintain compliance with financial regulations, especially for companies subject to audits or operating in highly regulated industries.
Maintain strong vendor relationships by making timely and accurate payments, which helps secure favorable terms and avoids disruptions. Transparent communication and dependable payment cycles build supplier trust and can be leveraged to negotiate better pricing or credit terms.
Strategically time your payments to improve cash flow while ensuring obligations are met. Leverage payment terms fully without incurring penalties and coordinate payments to align with cash availability and budgeting goals.
Use invoice matching tools to verify invoices against purchase orders and receipts, reducing the risk of duplicate or erroneous payments. Three-way matching significantly reduces discrepancies and enforces policy compliance across procurement and finance.
Match AP records against vendor statements frequently to identify and correct discrepancies. Ongoing reconciliation helps maintain accurate financial records, ensures liabilities are appropriately recorded, and prevents end-of-period surprises.
Accounts Receivable (AR) best practices
Send clear, detailed invoices promptly after goods or services are delivered. Clear formatting, itemized charges, and clear due dates reduce customer confusion and increase the likelihood of on-time payments.
Assess creditworthiness before extending terms to new customers to minimize risk. Establishing a strong credit policy helps reduce bad debt and enables more informed decisions about which customers to approve for credit.
Accepting various payment methods (credit cards, ACH, online payments) increases the likelihood of timely payment. Flexible payment options improve the customer experience and reduce friction in the payment process.
Use AR automation tools to trigger reminders for upcoming or overdue payments. Automated workflows streamline collection efforts and reduce manual workloads while increasing consistency and speed of outreach.
Encourage quicker payments through discounts or other benefits for early remittance. These incentives can help accelerate cash inflow, improve working capital, and foster stronger customer relationships.
Use reasonable late fees to encourage compliance with payment terms and cover administrative costs. Clearly communicating these policies upfront sets expectations and discourages delayed payments.
Reconcile your AR ledger with incoming payments frequently to keep your financial data accurate. This ensures timely recognition of revenue and allows you to quickly identify payment issues or misapplied funds.
How does automation help maintain AP and AR best practices?
Natural disasters and global events can lead to costly business interruptions - unless companies invest in automation to maintain accounts payable and accounts receivable best practices at all times. Without automation or access to a physical office, operations and profits stop. Plus, many talented employees prefer career opportunities that include remote work for improved work-life balance.
Investing in e-invoicing automation puts pertinent financial data at your fingertips when it matters. As a result, organizations support top talent while avoiding business interruptions and late payments. Plus, cloud automation provides a secure and collaborative environment for faster approvals and reviews. As a result, companies investing in complete automation solutions save money in accounts payable and accounts receivable, improving brand reputation and profits.
Finally, partial automation leaves room for costly human errors because it depends on manual processes. Complete AP and AR automation solutions help organizations establish and maintain superior accounts payable and receivable best practices. Additionally, they support remote work to avoid business interruptions and attract top AP and AR talent.
Discover the measurable ROI for automation today. Contact us to learn more about AP and AR best practices and the role automation plays in continued success in an evolving global marketplace.
FAQs about Accounts Payable vs. Receivable
What is the main difference between accounts receivable and accounts payable?
The main difference is that accounts receivable (AR) represents money owed to your business by customers, while accounts payable (AP) represents money your business owes to suppliers. AR improves cash inflow, and AP manages cash outflow.
Should AR and AP be segregated?
Yes. Segregating AR and AP roles supports internal controls and reduces the risk of fraud. It allows for clearer accountability and enables finance teams to specialize in either managing receivables or payables efficiently.
How to remember accounts payable vs. receivable?
A helpful memory trick: Receivable = Revenue (you’re receiving money); Payable = Payment (you’re paying money out). AR brings in cash, and AP sends it out.
Do you send invoices to AP or AR?
You send invoices to AP when billing a company and from AR when your company is issuing a bill to customers. AP handles incoming invoices (what your business owes), and AR handles outgoing invoices (what others owe you).
More resources
What automation can do that your ERP can’t
Unlock the full potential of AI in AP. See what an ERP alone can’t deliver.
Is your AP ready to scale?
Growth demands more than manual processes. The “AP maturity toolkit” helps you assess where your team stands today and what it will take to move to the next level of efficiency, control, and scalability.
What makes Medius different?
Looking at different AP automation solution providers?
