**Definition:**Accounts Payable (AP), also known as payables, are funds owed by a company to other businesses as a result of purchases of goods and services from them. Online businesses typically process invoices for third party services, but AP can also include bank loans.
Anytime a business obtains goods/services before actually paying for them, a short-term IOU is created, which counts as an AP transaction when finally paid. Some of the most common AP transaction types include:
Payroll transactions, including both regular salaries and bonuses
One-time service fees to contractors, consultants, and others for specific tasks performed
Invoices for new equipment/tools, packaging materials, office supplies, and other goods needed to continue operations
Utilities, Internet service, and Web hosting
Short-term loans used to expand facilities, launch new products, or to get through an economic downturn
Advertising expenses, both online and offline
The great importance of wisely managing accounts payable is clear from the basic fact that there is a time limit within which they must be paid in full to avoid going into default. Another factor is keeping suppliers happy by promptly responding to their inquiries and effectively communicating to them your requests. Finally, there are sometimes opportunities to gain discounts by paying accounts payable significantly far ahead of the due date (say around 45 days or more early).
Ecommerce businesses rely on AP loans as much as anyone else, but in ecommerce (and increasingly in brick-and-mortar establishments), automation software has enabled far greater efficiency. Both time and money are saved, first of all, simply by eliminating the need to circulate paper invoices. However, there are other ways that ecommerce AP programs can be beneficial, including:
Save time and increase efficiencyby automating AP processes on a network platform that integrates the whole procurement-to-pay cycle.
Easier accessto line-item data invoice status and payment timing take the tediousness out of finding the information you need to make AP-related decisions.
Cash and working capitalare freed up because there is greater visibility of cash inflow and outflow (both amount and timing). This also makes it more practical to take advantage of discounts that pay far better than the minimal interest banks are paying out at present.
Optimized payment processesfrom effective Accounts Payable management reduces a business' days payable outstanding (DPO), which, in turn, improves a business's reputation with suppliers.
Learn how Accounts Payable can be automated with an ERP: 7 Business Functions Affected by Sales Tax, and How ERP Integration Simplifies Compliance