Understanding Accounts Receivable and Accounts Payable: Key Financial Components
Accounts Receivable (AR) and Accounts Payable (AP) are key components of a company’s financial management. AR represents money owed to a business by customers for goods or services delivered on credit. Efficient AR management ensures steady cash flow and minimizes bad debts. AP, on the other hand, refers to a company’s obligations to pay suppliers or vendors for purchases made on credit. Proper AP management helps maintain good supplier relationships and avoids late payment penalties. Balancing AR and AP is crucial for financial stability, ensuring that a business can meet its short-term obligations while optimizing working capital and liquidity.