Accounts Payable and Receivable

The Cash Flow Lifeline

🔄 Quick Recall: In the previous lesson, we learned that profit and cash are different things. The gap between them? That’s largely driven by Accounts Payable and Accounts Receivable.

Your income statement might show a great month. But if clients are slow to pay and vendors want money now, you can be profitable and broke at the same time.

By the end of this lesson, you’ll manage both sides of the cash flow equation: money coming in and money going out.

Accounts Receivable: Money Owed to You

How It Works

When you complete work and send an invoice, you don’t always get paid immediately. The typical cycle:

1. Perform the work — Deliver the product or service
2. Send the invoice — Include payment terms (Net 15, Net 30, etc.)
3. Record the receivable — Debit Accounts Receivable, Credit Revenue
4. Receive payment — Debit Cash, Credit Accounts Receivable
5. Close the loop — Invoice is paid, receivable cleared

Payment Terms Explained

The Aging Report

This is your most important AR tool. It categorizes unpaid invoices by age:

Red flags:

• Anything over 60 days needs active follow-up
• Over 90 days may need to be written off as bad debt
• One client consistently late? Reconsider the relationship or require upfront payment

✅ Quick Check: Why is an aging report more useful than simply knowing your total accounts receivable balance?

Getting Paid Faster

Practical tactics that actually work:

1. Invoice immediately. Don’t wait. Send the invoice the day work is complete.
2. Make payment easy. Accept credit cards, bank transfers, and online payment links.
3. Shorten terms. If you’re using Net 30, try Net 15. Many clients pay at the deadline regardless.
4. Offer early payment discounts. 2/10 Net 30 motivates fast payment.
5. Follow up consistently. Polite reminders at 7 days, 14 days, and 30 days past due.
6. Require deposits. For large projects, get 25-50% upfront.

Accounts Payable: Money You Owe

How It Works

The flip side: bills you’ve received but haven’t paid yet.

1. Receive goods/services — Vendor delivers
2. Receive the invoice — Vendor sends a bill
3. Record the payable — Debit Expense, Credit Accounts Payable
4. Make payment — Debit Accounts Payable, Credit Cash
5. Close the loop — Bill paid, payable cleared

Managing Payables Strategically

Smart payable management isn’t just about paying bills. It’s about timing.

Pay early when:

• There’s an early payment discount
• You want to maintain a strong relationship
• You have excess cash

Pay on time (not early) when:

• You need to preserve cash
• There’s no discount for early payment
• You’re managing a tight period

Never pay late. Late payments damage relationships, trigger penalties, and can affect your credit.

Your AP Workflow

Weekly:

1. Review all incoming bills
2. Record new payables
3. Check upcoming due dates
4. Schedule payments for the week
5. File paid invoices

Cash Flow Management

AP and AR together determine your cash flow timing. Here’s the cycle:

You do work → Invoice (AR created) → Wait for payment → Cash arrives
                                    ↕
Vendor delivers → Bill arrives (AP created) → Payment due → Cash leaves

The gap between when you pay expenses and when you collect revenue is your cash conversion cycle. Shorter is better.

Cash Flow Strategies

Try It Yourself

Create an aging report for these invoices:

• Invoice #101: $2,000, sent January 5, unpaid (today is February 6)
• Invoice #102: $3,500, sent January 20, unpaid
• Invoice #103: $1,200, sent December 1, unpaid
• Invoice #104: $800, sent February 1, unpaid

Categorize each into: Current, 1-30, 31-60, 61-90, 90+ days.

Using AI for AR/AP Management

Try these prompts:

“Create a weekly accounts receivable follow-up email template for invoices at 7, 14, and 30 days past due. Professional but firm tone.”

“I have these unpaid invoices [paste list with dates and amounts]. Create an aging report and recommend which ones need immediate attention.”

AI can draft follow-up emails, generate aging reports, and suggest collection strategies. Pair it with your invoice generator skill for a complete workflow.

Key Takeaways

• Accounts Receivable (AR) is money owed to you—an asset on your balance sheet
• Accounts Payable (AP) is money you owe others—a liability on your balance sheet
• Aging reports are essential for tracking overdue invoices
• Cash flow management means optimizing the timing gap between AR collection and AP payment
• Invoice immediately, make payment easy, follow up consistently

Up Next

In Lesson 7: Tax Preparation, you’ll learn how to organize your books throughout the year so tax season is painless instead of panic-inducing.