What are accounts payable?
Accounts payable (AP) is the money a business owes suppliers for goods or services received on credit but not yet paid: recorded as a current liability on the balance sheet. AP is the mirror image of accounts receivable: one company’s AR is another’s AP.
Key metrics
- Days Payable Outstanding (DPO): AP ÷ Daily COGS × 365. Higher DPO means the business is using suppliers as a source of working capital: within reason.
- AP turnover: COGS ÷ Average AP. Indicates how quickly the company pays suppliers.
- Cash conversion cycle: DSO + DIO − DPO. Lower is better; negative CCC (Amazon, marketplaces) means suppliers fund the business.
AP vs. related concepts
- AP vs. accrued expenses: AP is invoiced and tracked supplier-by-supplier; accrued expenses are estimated for costs incurred but not yet billed.
- AP vs. trade credit: trade credit is the practice of buying on credit; AP is the balance-sheet record.
- AP vs. notes payable: notes payable involves formal written promises and interest; AP is short-term informal credit.
Strategic AP management
Treating AP as free short-term financing is tempting but has limits:
- Late payments damage supplier relationships and trigger interest or service interruption.
- Missed early-payment discounts (e.g., 2/10 net 30) can cost more in lost discounts than the interest saved by delay.
- Excessive DPO relative to peers signals distress to suppliers and rating agencies.
Do: negotiate standard terms upfront (net 30, net 60); pay early when discounts justify it; reconcile AP to supplier statements monthly.
Don’t: use AP as an unauthorised credit line by stretching payments: it erodes supplier trust and the cost compounds.
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