how does an increase in AP affect cash flow

how does an increase in accounts payable affect the cash flow? and also how does paying your accounts payable affect the cash flow

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Comments (4)

Dec 21, 2017

Accounts payable affect your cash flows because of the way accounting works for the computation of cash flows. The computation of cash flows is derived from the income statement: your revenues and costs. The problem is that those flows are dictated by accounting principles, and do not fully recognize the real cash flows of the company. Let's take an example:

You have 200 of revenues and 100 of operating costs. You already received cash from the revenues but have not paid your suppliers. Your accounts payable are therefore 100. If you compute the cash flow from the period from the income statement, you would find 200 - 100 = 100. In reality, because you haven't paid your suppliers yet, the cash flow is 200 from the cash you collected from revenues, which is indeed the result of revenues - costs + AP = 200 - 100 + 100.

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Dec 21, 2017

From this you can infer that paying your accounts payable decrease your cash flow, and that an increase in accounts payable should lead to an increase in cash flow.

Dec 21, 2017

It shortens the cash conversion cycle. You get to keep cash on hand for a longer period of time.

Dec 21, 2017