Businesses of all kinds must resort to paying its partners and vendors or suppliers. These expenses, no matter how simple or complicated, start to add up and need to be organized in a way that allows the process of making payments to be as efficient as possible. Without an official process in place, organizations can very easily lose track of payments or debts owed to a variety of stakeholders, especially as they continue to grow.
Understanding how to approach this important concept can help save businesses a lot of stress and time in the long run. It will also save organizations from potentially missing payments or owing more to the recipients in the long run. With a smooth process in place there will be less focus on playing catch-up with payments, and more time focused on the work that matters.
What is Accounts Payable?
Accounts Payable is officially defined as the money owed to a company’s suppliers, partners, or contractors that must be paid within a short-term time frame, usually monthly. These payments are often recurring, as companies use the same trusted suppliers again and again. AP debts are considered short-term liabilities on a company’s balance sheet and any total increase or decrease since the prior period is reflected in the company’s cash flow. All accounts payable debts can be later converted into notes payable debts, but not vice versa. Paying these outstanding bills as close to the due date as possible will help improve cash flow, but it’s not a must and these practices depend on the organization.
Probably the biggest difference between accounts payable and notes payable is the timeframe in which payments need to be made. But we’ll touch more on that later.
What is Notes Payable?
Notes payable is a much broader concept of payments that allows for longer periods of financial planning and more control when compared to accounts payable and short term payments. Notes payable is a much broader concept of payments that allows for longer periods of financial planning and more control when compared to accounts payable and short term payments. Notes payable debts or payments are usually long term liabilities to financial institutions in the form of formal promissory notes. NP act as a written promise to the financial institutions, such as banks or credit companies. They can be thought of as a formal loan agreement, with outlined information regarding interest expense and various payment deadlines in the written agreements. If the debt repayment occurs within the period of a year, it is considered a short term liability, and if it occurs over a period longer than a year, it is considered a long term liability.
Let’s look at an example:
A SaaS company borrows $25,000 from a bank to put towards company growth and scale. The company would write a credit for $25,000 to its notes payable account, and a debit for the same amount to its cash account. This SaaS company plans to repay the bank within one year, so it considers the debt a current liability on the balance sheet. (If they planned to repay their notes payable in a period longer than one year, it would be listed as a long term liability on the balance sheet.)
Key Differences Between the Two
Oftentimes people tend to use accounts payable and notes payable interchangeably. But beyond differences in payment due dates and scheduling, there are several ways to remember how to keep the two terms straight.
Accounts Payable vs. Notes Payable
The main difference between the two terms is that accounts payable payments are more informal and short-term, without a lot of specific obligations outlined for the selected supplier. Notes payable payments can be short or long-form, include far more stipulations, and are always formal written contracts.
AP vs NP Breakdown:
- Short term obligations recorded as a current liability or short term liabilities
- Debts due to vendors, suppliers, or business partners
- Minimal specific terms; due date and fee for late payment
- Accounts payable entries can be converted into notes payable if the organization needs more than the allotted 12 months to make the payment
- Long term obligations written as promissory notes, recorded as long term liabilities
- Debts due to financial institutions such as banks or credit unions
- Many detailed specific terms are outlined; payment schedules, interest rates, maturity periods and more
- Notes payable entries are considered a signed agreement that cannot be changed
How Both Accounts Payable and Notes Payable Can Help Improve Business Operations
Keeping accurate logs of expenses and owed payments of all kinds is important to any business’s spend management process, as well as their specific spend management strategy. A smooth accounts payable process helps organizations keep track of invoices, avoid late payments and fees, and fulfill their short term obligations. Notes payable on the other hand is crucial to business health as well, but for slightly different reasons. Accurately booking notes payable on the company’s general ledger or balance sheet helps finance and accounting teams not only keep track of longer term payment obligations, but ensure timely payments that allow you to avoid interest payments, late fees, and an overall mess. Paying back these loans to banks or other financial institutions also helps build good credit, and notes payable overall allows businesses more time and room for strategic future planning.
Look to Automation to Further Streamline the P2P Process
AP automation software helps growing organizations get a handle on an often messy and stressful accounts payable process. Manually inputting data from each invoice leaves a lot of room for error, some that can be caught and corrected, and some that are far more difficult to go back and fix. Automation software eliminates the need for manually inputting invoices, increases data transparency, makes auditing easier, and even adds a layer of fraud protection.
Automation software can easily integrate with your ERP, making invoice routing simple, helping your team track expenses, lower costs, and gain more operational control.