Accounts Payable in Cash Flow Statement: Definition & Examples

A cash flow statement summarizes a company's cash inflows and outflows. Accounts payable is also recorded in the cash flow statement since it involves transferring money from the company in the near future to the vendors' bank accounts. 

Despite accounts payable noted as a liability in the balance sheet, it is accounted for differently than expected. In this blog, we'll discuss the impact of accounts payable on the cash flow statement. 

What is accounts payable?

Accounts payable refers to money a company owes its vendors for purchases made on credit. These are usually paid back quickly, like a week or thirty days, and hence aren't considered loans or debt. 

For example, suppose your company hires the consulting services of an individual who needs to be paid one week after the invoice has been sent. In that case, the transaction will be considered accounts payable until the dues are cleared. 

An accounts payable journal entry is recorded twice, once when the services are incurred in the accounts payable account as a credit and debit when the debt is paid off. 

Impact of accounts payable on cash flow

Types of cash flow

A cash flow statement generally contains information about cash flowing into and out of the company. The types of transactions in a cash flow statement can be divided into three categories: 

Cash from operating activities

Cash from operating activities refers to cash flow due to business operations by the company. This cash can result in cash inflows, such as cash generated from selling products or services, or outflows, such as operating expenses, employee salaries, taxes or rent payments. 

Accounts payable and accounts receivable are also a part of this category in a cash flow statement. Accounts payable accounts for credit purchases, and accounts receivable accounts for money yet to be received. 

Cash from investing activities

Cash from investing activities refers to money generated from the company's investments, such as loans given to vendors, buying or selling assets and merger and acquisition-related payments. 

Cash from financing activities

Cash from financing activities refers to money derived from or paid to investors, banks and other shareholders of the company. This includes debt repayment or purchasing and repurchasing of stocks of the company. 

How accounts payable is recorded

The company's cash flow statement denotes the cash it has in hand. Since accounts payable is money owed to vendors which still need to be paid, it is reflected as positive cash flow in the statement. Similarly, accounts receivable, money yet to be received from customers, is accounted as negative cash flow in the cash flow statement. 

How accounts payable affects cash flow

A huge increase and a considerable decrease in accounts payable is not good for a company's finances. A change in accounts payable can drastically change the company's income and cash flow statements. 

Impact of increase in AP

Increasing AP indicates that a business has been paying its vendors less frequently. This leads to an increase in the cash reserve and, hence, positive cash flow. 

However, paying vendors late can negatively impact creditworthiness and may lead to late payment fines or missed early payment discounts. 

Impact of decrease in AP

A decrease in AP indicates that the company has been paying off its vendors quicker than usual. This results in decreased cash flow and hence negatively affects the cash flow statements. 

Paying your vendors too early can also be detrimental to the financial health of the company as it decreases the cash reserves that could have been put to better use otherwise. 

Example of accounts payable in cash flow statement

Suppose a company has net earnings of $2,000,000 in the financial year of 2023. The company has an increase in accounts payable of $100,000, a decrease in accounts receivable of $150,000 and taxes payable at $200,000. 

Since accounts payable and taxes payable are yet to be paid, they would be considered as positive cash flow and hence added to the net earnings. Accounts receivable is money yet to be received by the company and leads to a decrease in cash flow. 

The final cash flow of the company thus turns out to be $2,000,000 + $100,000 - $150,000 + $200,000

I.e. $ 2,150,000 is the cash flow for the company. 

Tips to improve cash flow

Maintaining a healthy cash flow is of the utmost importance for companies. Here are some tips to maintain healthy cash flow:

Negotiate favorable payment terms

It is important to be able to pay invoices when it is suitable for you. Hence, negotiating favorable payment terms from your vendors is paramount for a healthy accounts payable cash flow. 

Grab early payment discounts

Spend optimization has become an important aspect of businesses nowadays. In a world where every penny counts, grabbing early payment discounts is necessary when managing cash flow. This doesn't only reduce costs but also improves your vendor relationships and avoids payment delays. 

Reduce costs

Though increasing revenue is an important call when it comes to cash flow management, reducing costs is also a huge contributor. Constantly analyzing and optimizing your spending ensures you're not paying more than you need to and safeguards you from fraud. 

Consider adopting AP automation

Automating your accounts payable will reduce your accountant's manual work, allowing them to focus on more strategic tasks. It will also help you save costs by allowing you to view your balances in real-time via interactive dashboards and reduce errors by automatic data capture and invoice matching. Some AP automation vendors, like ClearTech, also show important insights like spikes in line item amounts on the invoice screen, allowing you to rectify mistakes before the bill is paid. 

Regularly monitor accounts payable

Regularly monitoring and optimizing your business functions is also important to keep up with your needs. Regularly monitoring accounts payable and other metrics will help you identify where your processes are failing and rectify them before it hurts your finances. 

Key takeaways 

• An increase in accounts payable increases the cash flow since the money hasn't yet left the company. 
• Increasing the frequency of paying back vendors affects cash flow negatively, while decreasing it affects cash flow positively. 
• Maintaining a healthy cash flow is of the utmost importance for the company's financial well-being. 
• Negotiating favorable payment terms, regularly monitoring finances and business functions, reducing costs and grabbing early payment discounts help maintain a healthy cash flow. 
• Adopting AP automation will allow you to monitor your finances in real-time while reducing processing time, costs and manual errors. 

FAQs

• Where does accounts payable go on cash flow statement?

Accounts payable fall under cash from investing activities in the cash flow statement. 

• Is accounts payable included in cash flow?

Accounts payable is cash set aside to pay your vendors, which hasn't gone out yet and is hence included in cash flow as a positive. 

• What does accounts payable mean on cash flow statement?

Accounts payable is the amount a company owes its vendors for purchases made on credit, meant to be paid back in a short amount of time. 

• Is accounts payable an operating expense?

Accounts payable are ongoing expenses yet to be paid to the vendors, while all expenses incurred for business operations come under operating expenses.