Last week we looked at accounts receivable. Now we’re going to take a look at accounts payable.
Your accounts payable are all the money you owe your vendors.
Accounts payable typically do not charge interest and are typically due within 90 days. Loans and mortgages are not included in accounts payable.
The key point here is that they don’t charge interest. So accounts payable are essentially an interest-free loan. As long as you don’t get out of hand and you are still able to pay all your bills, it makes financial sense to keep money in accounts payable for as long as possible.
If you’re considering two vendors who have an identical product at the same price, it makes sense to go with the one who gives you longer to pay. Even if you don’t need the extra time to pay, having it allows you to leave the money you owe in an interest-bearing account.
Let’s visit Dr. Deedee Ess to see the effect of accounts payable in her office. We’re going to do some light math here, so please bear with us.
Dr. Ess is in the market for a top-of-the-line panoramic x-ray system. It will cost about $100,000. She has the money set aside for it, and she prefers not to finance.
If she buys from Acme Dental, the bill is due in 30 days. If she buys from Trident Dental, the bill is due in 90 days.
With Trident, she’ll be able to keep the money in her account for an extra 60 days. And she can get 2% interest in her savings account.
That extra 60 days will earn Dr. Ess more than $300 in interest.
Now, $300 compared to the $100,000 cost of the system may not seem like a lot. But imagine if you found $300 in a pair of pants you hadn’t worn for a few years. It’s basically free money.
When you add up all you pay to vendors over the course of a year, 30 days accounts payable vs. 90 days accounts payable can make a nice difference in terms of money you can earn from interest.