Account Payable: What They Are & Why They Matter

Last week we learned about Accounts Receivables (A/R). Check it out here if you missed the email.

Also, let us know if there’s one accounting concept you want us to cover. We’d love to tailor it to your specific needs.

We’re staying in the balance sheet this week and looking at another type of account. Except this time it’s on the liabilities side of things.

This week’s lesson: Accounts Payable (A/P)

Let’s roll!

What is An Account Payable (A/P)?

A/P is a short-term outstanding debt (credit) from a company’s supplier or vendor. AP represents the total amount due to suppliers for goods and services that the company hasn’t paid.

Another way to think about it: one company’s A/P is another company’s A/R.

Lemonade-Stand Example

Last week we looked at a credit exchange to show A/R. We viewed this transaction from the company’s perspective. But remember, one company’s A/R is another entity’s A/P.

Part of operating a lemonade stand is buying key supplies like lemons and sugar. You have a great relationship with a local lemon supplier, Lemons, Inc.. You need 100 lemons for next week’s forecasted demand.

But you don’t have the cash right now. You spent it all on advertising/marketing to attract new customers.

So you go to Lemons, Inc. and say, “Hey, I need 100 lemons and I’ll pay you within 30 days from receipt of the lemons.”

The other company agrees because they know the relationship and they know you’ll pay on time. They ship you the lemons with a $200 payment due in 30 days.

That $200 payment is a new account payable for that period.

Account Payable Effects on Cash Flow

A/P has a positive effect on a company’s cash flow. This makes sense because you’re foregoing payment now, with the promise of paying later. You can see it on Facebook (FB)’s cash flow statement below:

Every $1 of new A/P means $1 more you don’t have to spend today.

That said, those payments must be made over time.

Here’s a couple heuristics for gauging A/P figures:

    • Increase in A/P = more goods/services bought on credit
    • Decrease in A/P = company paying off prior debts faster than buying new goods/services on credit

Summary: A/P Helps Cash Flow, But Take Caution

A/P management is a great way to maintain high levels of cash flow. The less you have to pay out upfront, the better. That said, lookout for companies with ever-rising A/P balances on weak balance sheets. If a company doesn’t have the cash to pay it’s A/P, it could slip into default.

Related Posts

Subscribe To Our Newsletter

Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.

AK

Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.