Accounts Payable Management and its Impact on Profitability

Accounts Payable Management and its Impact on Profitability

The golden rule of balance sheet demands that the sum total of liabilities and shareholder’s equity of a company must be equal to the assets of that company.  Despite this statement appearing to be obvious, most firms make very big errors whenever their balance sheet doesn’t balance properly. This leads to serious problems with financial projections. Accounts payable are what a company usually owes its vendors or suppliers from which it purchases its supplies and inventory. Accounts payable is often located on a company’s balance sheet. They are the current liability of any company and are clearly outlined on the right hands side of the company’s balance sheet. They are usually paid to the supplier within a maximum duration of one year.

Just like any liability or asset, a company’s unpaid bills can have a very significant impact on the overall profitability either negatively or positively. Accounts payable affect the profitability of a company through two major ways: company’s cash flow and the company’s relationship with its vendors or suppliers. Accounts payable can impact quite positively on a company’s profitability if one has the best practice in managing accounts payables. First, the company will be able to settle its bills on time. This appears to be a rather simple practice.............