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How Accounts Payable affect cash

Page history last edited by PBworks 12 years ago

Question:

Why do you measure accounts payable in a business plan, and why is it important? Do the banks or investors look at it at all?

 

Answer:

Yes, accounts payable is a vital part of a business plan financial analysis.

 

The simple exlanation is that every dollar you have in accounts payable is a dollar added to cash. Why? Well, try it. Buy something from a friend for a dollar, and tell your friend you'll pay it next week. See? You made the purchase, you have what you bought, but the money is still in your pocket. You have added to your accounts payable.

 

That's what accounts payable is: money you owe but haven't paid. Most businesses pay their vendors in 30 days or more. That's the standard in business-to-business transactions.

 

To give you a more specific example, the way Business Plan Pro plans cash is to start with your profit and loss for the month, and then add back the money that came out of your profits as costs or expenses, but wasn't paid out of the bank account because it stayed in accounts payable. So as the cash projection works its mathematical magic, an increase in accounts payable generates cash, and a decrease costs you cash. Magical as that seems sometimes, that is the correct financial and mathematical treatment.

 

Tim Berry

experts@paloalto.com

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