Is Outsourced Accounting Right for Startups?

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Organizations are bound to meet several costs in their day to day operations in order to remain relevant. Debt is a broad category which encompasses obligations that are more or less considered as actual liabilities; another form of liability which may not strictly be regarded as debt but is still a significant obligation that a firm must meet is accounts payable. Likewise, is accounts payable debt? Come, let us take it further down.

What is Accounts Payable?

Accounts payable mean money that the business has to pay to the suppliers or vendors for goods or services that were received on credit. It is part of the property, plant and equipment that include goods to be sold within one year – Inventory. For instance, if a company buys raw material worth $5,000 from a supplier and has not settled the bill, then, the $5,000 purchase of supplies is recorded as accounts payable.

Accounts payable are current liabilities for a business organization since although it may take 30 or 60 days before an organization can make the payment; the financial liability arises as soon as an order is placed or goods/services are received. The accounts payable will be paid in the short-term in its normal state of doing business.

Accounts payable can be defined as a liability whereby an organization owes money to its creditors and suppliers so that Accounts payable is a liability to those creditors and suppliers while debts can be defined as anything that an organization owes to its creditors.

While accounts payable represent legitimate financial obligations, some key characteristics differentiate them from actual debt:

1. Term of accounts payable- Accounts payable are paid within one year or the operating cycle of the business. Debt has longer terms of repayment that span one year or more depending on the agreed terms by the borrower and the money lending agency.

2. Interest – It is a rare occurrence to find interest included in accounts payable. The liabilities also come with interest expense like in the case of bank loans or bonds where the total amount to be repaid is higher due to the interest accrued over a period.

3. Collateral – accounts payable are non-GHG while lots of business debts have forms of security such as real estate, equipment, or other assets that can be repossessed in the event of nonpayment.

4. Legal documentation – Debt entails contract and loan origination which involves legal contracts. Accounts payable are unscheduled supplier or vendor credit facilities.

This is why, although AP is reported on the balance sheet as liabilities, it can be discussed that they are not actual debt.

Why it is important to manage Accounts Payable appropriately

While accounts payable is not considered as liability it is still important for the smooth running of many organizations to ensure efficient management of accounts payable and prompt payment to suppliers or vendors. Here’s why:

Documents receivables – Most companies pay suppliers late it can affect the cash flows of a firm especially the small firms that have lower liquidity. It is important to set up reliable payment schedules that must be followed by customers within 30-60 days.

Supplier relationships – Delays in payments will erode key business relationships with suppliers and affect basic supply supplies of inventory and other supplies needed in business operations.

Business credit reports – similar to the people, business people have a business credit report that determines the amount of credit or loan or the better payment terms the business may be offered in the future by suppliers. If such bills are paid after the due date, it is very harmful for business credit.

Marketing, operations, and growth plans – having a lot of cash locked up in overdue supplier payables reduces the amount of capital available for reinvestment, especially in key areas such as expansion strategies, product development, and talent acquisition.

Although specifics show that accounts payable is not exactly a liability or an expense that incurs interest, companies must make timely payments a top priority. It is vital for a firm’s success that accounts payable within the company are managed well and supplier relations maintained. Accounts payable that are not paid on time, if they become too big, or if they keep getting out of line with contractually agreed terms, can threaten the continuity of supplier credit and limit a company’s growth, even though there is no legally binding debt on the balance sheet.

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