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E-commerce Accounts Payable
financeMoney a business owes to its suppliers, vendors, or creditors for goods or services received but not yet paid for. It represents the credit extended to the company by its suppliers.
Definition
Accounts payable (AP) is the mirror image of accounts receivable: it is the money you owe to others. When a supplier delivers raw materials with net-60 payment terms, that amount is an accounts payable obligation until you pay. AP is a liability on the balance sheet and a critical component of cash flow management.
Strategic management of accounts payable can significantly improve cash flow. By negotiating longer payment terms with suppliers (net-60 or net-90 instead of net-30), a business keeps cash available for longer. However, this must be balanced against supplier relationships and potential early payment discounts. A common discount term of "2/10 net 30" means you get a 2% discount for paying within 10 days, which translates to an annualized return of roughly 36%, making it almost always worth taking.
The interplay between accounts receivable and accounts payable determines a business's cash conversion cycle. If you collect from customers in 30 days but must pay suppliers in 15 days, you have a negative cash gap that requires working capital to bridge. If you collect in 15 days but can pay suppliers in 45 days, you have a positive cash gap that actually generates free cash flow from operations.
Formula
Days Payable Outstanding (DPO) = (Accounts Payable / COGS) x Number of Days Example
A retailer has $75,000 in accounts payable and monthly COGS of $150,000. DPO = ($75,000 / $150,000) x 30 = 15 days. This means the company pays its suppliers in an average of 15 days, which is very fast. Negotiating net-30 terms would improve cash flow significantly.
Related Terms
Accounts Receivable
financeMoney owed to a business by its customers for goods or services delivered but not yet paid for. It represents the credit a company extends to its customers.
Cash Flow
financeThe net amount of cash moving into and out of a business over a specific period. Positive cash flow means more cash is coming in than going out; negative cash flow means the opposite.
Working Capital
financeThe difference between a company's current assets (cash, receivables, inventory) and current liabilities (payables, short-term debt). It measures the ability to fund day-to-day operations.
Cost of Goods Sold (COGS)
ecommerceThe direct costs attributable to producing or acquiring the goods sold by a company. COGS includes materials, direct labor, and manufacturing overhead, but excludes indirect costs like marketing and administration.
Put It Into Practice
Use these calculators to apply accounts payable to your own numbers.
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