Accounts payable vs accounts receivable represents two sides of the same financial coin that affect your business’s cash flow. Accounts payable (AP) is the money your business owes suppliers or creditors for purchased goods and services. Accounts receivable (AR) represents the money customers owe your business for products or services you’ve already delivered.
The differences between accounts receivable vs accounts payable play a significant role in maintaining financial wellbeing. A business can confidently plan for growth with these two processes properly balanced. Financial stability needs immediate attention if they become unbalanced. Finance teams track days payable outstanding (DPO) as a vital metric that shows the average time your company takes to pay creditors and suppliers.
Transactional finance professionals remain in high demand, and businesses of all sizes now prioritize automating these processes. This brings up a practical question: which process should you automate first? This piece breaks down the fundamental differences between AP and AR software. You’ll learn the benefits of automating each process and determine the right automation strategy that fits your specific business needs.
Accounts Payable vs Accounts Receivable at glance
| Aspect | Accounts Payable (AP) | Accounts Receivable (AR) |
| Balance Sheet Classification | Current Liability | Current Asset |
| Normal Balance | Credit balance | Debit balance |
| Primary Users | Internal finance team and vendors | Customers |
| Data Processing | Processes incoming vendor invoices | Manages outgoing customer invoices |
| Cash Flow Effect | Positive at the time of increase (delayed payment) Negative at the time of decrease | Negative at the time of increase Positive at the time of decrease |
| Standard Payment Timeline | 30-90 days | 30-90 days |
| Key Performance Metric | Days Payable Outstanding (DPO) | Days Sales Outstanding (DSO) |
| Automation Benefits | – 85% cost reduction – Reduces processing cost from $64,500 to $8,850 for 5,000 invoices – 15% time spent on asking | – 67% faster collection of overdue payments – 32% reduction in DSO – 50% reduction in outstanding receivables |
| Automated Performance | Processing speed improved by up to 80% | Average DSO of 40 days (vs 52 days manual) |
| Primary Software Features | – Invoice capture – Approval processes – PO matching – Payment scheduling | – Invoice generation – Customer payment tracking – Collections automation – Self-service customer portals |
What Is Accounts Payable (AP)?
A business owes money to suppliers and vendors for goods and services bought on credit. These short-term debts are called accounts payable. Companies usually need to pay these debts within 30 to 90 days. Money flows differently in accounts receivable vs accounts payable – AR brings money in while AP sends it out.
Balance Sheet Classification
You’ll find accounts payable listed as a current liability on a company’s balance sheet. This matters because these obligations need payment within a year or during the operating cycle, whichever takes longer. The main difference between accounts payable vs receivable shows up in their balance sheet positions. AP sits with liabilities, while AR belongs with assets.
Cash Flow Impact
The link between accounts payable and cash flow is simple but strategic. Companies see positive cash flow when AP increases because they buy more on credit instead of spending cash right away. The opposite happens when AP decreases – cash flow turns negative as businesses use money to pay their debts.
Companies track how long they use trade credit before paying bills through the average payable period. This shows how many days they keep each dollar of trade credit. Every extra day helps because it delays cash outflow and gives free financing for operations.
Normal Balance
AP keeps a normal credit balance. Since it’s a liability account, credits make it bigger and debits make it smaller. The balance sheet shows more liability when companies record invoices as credit entries. The outstanding balance goes down when they make payments by debiting the account.
Role in Business Operations
AP does more than just track debts. Good AP management leads to better cash flow records and vendor relationships. Companies can also save money this way. Smart payables management helps businesses get better supplier terms and early payment discounts.
AP teams make sure they only pay correct and legitimate invoices. Good accounts payable management helps a company’s credit rating and financial health. Companies can make smarter cash flow decisions by using automated solutions to analyze invoice data.
What Is Accounts Receivable (AR)?
Accounts receivable (AR) represents money your customers owe for goods or services they’ve received but haven’t paid for yet. You can think of AR as a legal claim to get future payments, which customers usually make within 30-90 days after the sale.
Balance Sheet Classification
Your balance sheet treats accounts receivable and accounts payable quite differently. AR shows up as a current asset on your balance sheet, because you expect to collect this money within a year or less. This placement is vital to evaluate your business’s short-term liquidity and financial health. You’ll find AR listed under current assets along with cash, cash equivalents, inventory, and other securities you can quickly convert to cash.
Cash Flow Impact
AR and cash flow have an inverse relationship compared to accounts payable. Your cash flow decreases when AR goes up, which means customers owe you more money but haven’t paid yet. Your cash flow statement subtracts this amount from net income during this time. On the flip side, when AR goes down, it means customers are paying faster. This boosts your available cash and makes your company more liquid. The cash flow statement adds this decrease to your net income.
Normal Balance
AR works differently from accounts payable because it has a normal debit balance. AR increases with debits and decreases with credits. When you sell something on credit, you debit the AR account to increase the asset. So when your customer pays, you credit AR to reduce the asset. Picture AR as a bucket that fills up with debits when customers owe you money and empties with credits when they pay.
Role in Business Operations
AR helps you manage your business’s working capital and streamline processes. The way you handle AR can affect your company’s cash position, daily operations, and customer relationships. Smart AR management can lead to better financing terms and credit access. Your disciplined approach to AR shows investors and partners that you know how to manage money well. The AR turnover ratio shows how quickly you collect payments—higher numbers mean customers pay faster.
Key Differences Between AP and AR Software
AP and AR represent opposite sides of a company’s financial operations. The software solutions designed for each serve distinctly different purposes. Understanding these core differences will help you determine which automation path might benefit your business most.
Primary users: vendors vs customers
Your internal finance team and vendors who supply goods and services are the main users of AP software. The system makes payment approvals easier through an optimized process. Routine invoices get quick approval and payment while unusual transactions need explicit review. This approach substantially reduces fraud risk through structured approval workflows.
AR software connects directly with your customers. The system creates and sends invoices while tracking their payment status. A PYMNTS.com survey of over 2,200 businesses revealed that companies using automated AR systems collected overdue payments 67% faster than those using manual processes. These automated firms achieved an average DSO (Days Sales Outstanding) of just 40 days compared to 52 days for companies with manual processes.
Data inputs: invoices received vs invoices sent
AP automation reads multiple incoming vendor invoices simultaneously. It extracts relevant information using Optical Character Recognition (OCR) technology. The system matches Purchase Orders (POs) to vendor invoices, a process that often creates several “tripping hazards” with manual handling.
AR automation transforms the order-to-cash cycle by managing outgoing invoices. Users can control invoice creation and delivery timing after entering client billing addresses, information, and account data. This automation creates an optimized process from invoice creation through payment collection.
Impact on working capital and liquidity
Both systems substantially affect your company’s working capital from opposite directions. AP automation helps manage cash reserves while meeting payment obligations. Companies can optimize their cash position and capture early payment discounts through strategic payment scheduling.
In stark comparison to this, AR automation’s main benefit comes from reducing Days Sales Outstanding—a metric of “paramount importance to a business’s financial well-being”. Companies maintain healthier cash flows by accelerating collections. This ensures adequate liquidity to meet their payment obligations. The balanced approach to automation creates powerful synergies that make integrated solutions superior to managing these processes in isolated systems.
Metrics That Matter in AP and AR Automation
Companies need to track specific performance indicators to measure efficiency and gage how automation affects cash flow in accounts payable and receivable processes. These metrics serve as significant benchmarks that help evaluate automation success and identify areas needing improvement.
Days Payable Outstanding (DPO) vs Days Sales Outstanding (DSO)
DPO shows the average number of days a company takes to pay suppliers after receiving goods or services. The calculation uses (Average AP ÷ Cost of goods sold) × Days in the accounting period. Better working capital management comes from extending DPO because it allows companies to hold cash longer. Vendor relationships could suffer and late fees might pile up if DPO gets too high.
DSO measures how fast a business turns credit sales into cash. The formula is (Accounts Receivable ÷ Credit Sales) × Days in period. Companies with lower DSO numbers have more effective collection practices. B2B trade typically sees a DSO cycle of 30 days or less. Average Days Delinquent (ADD) tracking helps show how long invoices stay unpaid after their due date.
Accounts receivable turnover vs accounts payable turnover
Net Credit Sales ÷ Average Accounts Receivable gives us the accounts receivable turnover ratio which measures collection efficiency. Quick collection of receivables shows in higher values, though very high numbers might point to overly strict credit policies.
Total Cost of Sales ÷ Average Accounts Payable calculates the accounts payable turnover ratio that shows payment frequency to suppliers. Strong supplier relationships often come with a high ratio but could mean early cash outflow. Cash flow problems or strategic cash management might be behind a low ratio.
Working capital ratio and its implications
Current Assets ÷ Current Liabilities calculates the working capital ratio (current ratio) that reveals a business’s ability to cover current liabilities with existing assets.
Positive working capital shows in ratios above 1, while negative working capital appears in ratios below 1. Most businesses shoot for a working capital ratio between 1.2 and 2. Bill payment struggles might surface below 1.2, while ratios above 2 could mean cash sits idle instead of being invested strategically.
The Working Capital Funding Gap calculation uses AR Days + Inventory Days – AP Days. Positive gaps mean companies need working capital for those days, while negative gaps suggest they don’t.
Benefits of Automating AP and AR Separately
Automation of financial processes creates measurable value on both sides of the accounting equation. These tools work independently and complement each other to create value.
Automation benefits for accounts payable
Companies with minimal automation spend USD 8.78 per invoice—USD 7.01 more than those who embrace automation technology. AP automation cuts costs and reduces human error through system validation checks that make data entry more efficient. Processing 5,000 invoices manually costs USD 64,500 monthly, while automation brings this down to USD 8,850—an 85% savings. The best AP departments spend only 15% of their time answering questions, compared to 29% for departments that use manual processes.
Automation benefits for accounts receivable
AR automation cuts down the order-to-cash cycle by a lot. Companies that use automated systems collect late payments 67% faster than those using manual processes. This boost in efficiency results in 40 days average DSO for automated firms versus 52 days for manual operations. Finance leaders now see accounts receivable as a strategic priority, with 75% agreeing. Companies using AR automation see their days sales outstanding drop by 32% and outstanding receivables fall by 50%.
Common features in AP/AR software tools
These systems come with intelligent data capture using OCR technology, workflow automation, payment processing capabilities, and detailed analytics dashboards. AP solutions focus on invoice capture, approval workflows, PO matching, and payment scheduling. AR platforms emphasize invoice creation, customer payment tracking, collections automation, and self-service customer portals.
Examples of AP and AR automation in action
Siemens uses intelligent capture software that extracts over 50 data fields from invoices with 90% accuracy without human input. This improved process automation by 30% on average, reaching 80% in some cases. Canal Barge made their financial operations more efficient by removing paper processes. They grew billing by 20% without adding AP staff. Stack Overflow cut 90% of manual processes, while LucidWorks gained better spending control through improved financial controls.
Which Should You Automate First?
Businesses must evaluate their specific needs to choose between accounts payable vs accounts receivable automation. The right choice can transform financial operations. A wrong sequence could slow down your return on investment.
Key factors: cash flow, team size, invoice volume
Your business’s cash flow challenges often point to the best starting point. Companies that struggle with supplier payments or penalties should start with AP automation. The size of your team plays a vital role since AR automation cuts headcount costs by 20-50%. Your invoice volume directly affects processing expenses. Manual processing costs USD 15.00 per invoice, while automation slashes this cost by up to 80%.
When AP automation makes more sense
Your business should focus on AP automation if you face delayed invoice approvals, cash flow problems, or late payment penalties. Companies that process over 2,000 monthly invoices benefit most from AP automation. AP automation helps organizations cut invoice processing costs by 76% and speeds up processing by 81%.
When AR automation should be prioritized
Late customer payments that hurt your operations call for AR automation first. AR automation helps companies collect overdue payments 67% faster than manual processes. Companies see their DSO drop by 32% after implementing AR automation. Delayed B2B payments cause nearly 50% of annual business failures, which makes AR automation a vital solution.
Hybrid approach: automating both gradually
A phased implementation strategy works best according to experts. The ideal approach starts with high-impact areas and expands based on learned insights. This method enables smooth transitions and better configurations. AP and AR automation deliver maximum benefits when they work together in an integrated financial ecosystem.
Conclusion
Your choice between accounts payable and accounts receivable automation will depend on your business challenges and financial priorities. These systems are the foundations of your financial ecosystem and they handle different aspects of cash flow management.
Note that automation goes beyond just cutting costs—it revolutionizes your finance team’s operations. AP teams with automated systems spend 15% of their time to ask queries compared to 29% with manual processes. AR automation lets finance departments handle 20% more billing without adding staff.
The real question isn’t if you should automate financial processes, but when and how. The right automation strategy matches your business needs, cash flow challenges, team size, and invoice volume. This creates a foundation for better financial performance and lasting growth.
FAQs
Q1. What is the difference between account payable and account receivable?
AP automation focuses on managing outgoing payments to suppliers, while AR automation handles incoming payments from customers. AP streamlines invoice processing and vendor payments, whereas AR accelerates customer invoicing and payment collection.
Q2. How does automating AP and AR impact a company’s cash flow?
Automating AP can improve cash flow by optimizing payment timing and capturing early payment discounts. AR automation enhances cash flow by reducing Days Sales Outstanding (DSO) and accelerating the collection of customer payments, potentially by up to 67% faster than manual processes.
Q3. What are the key metrics to track when implementing AP and AR automation?
Important metrics include Days Payable Outstanding (DPO) for AP and Days Sales Outstanding (DSO) for AR. Additionally, tracking the accounts payable and receivable turnover ratios, as well as the working capital ratio, can provide insights into the efficiency of your automated processes.
Q4. How much can a company save by automating AP and AR processes?
AP automation can reduce invoice processing costs by up to 85%, lowering the cost from $8.78 to approximately $1.77 per invoice. AR automation can lead to a 32% reduction in DSO and a 50% reduction in outstanding receivables, significantly improving cash flow and reducing operational costs.
Q5. Should a company automate both AP and AR simultaneously, or focus on one first?
The decision depends on your specific business needs and challenges. If you’re struggling with supplier payments or invoice processing, start with AP automation. If delayed customer payments are impacting your operations, prioritize AR automation. Many experts recommend a phased approach, starting with the area of greatest need and gradually expanding to both systems for optimal results.