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Accounts payable aging is a term that refers to the amount of time a company takes to settle outstanding balances due to its creditors and suppliers. Unlike accounts receivables aging which tracks the time frame that customers take to remit payments on issued invoices, the payable aging focuses on how the company sets up and manages payment of the debts owed by the business. The general idea behind this aging process is to identify potential issues that could lead to the assessment of late charges and other fees which would increase the expenses of the company, and arrange the payment schedule so that as much of the debt as possible is paid within terms.
While there are different strategies used to manage accounts payable aging, most companies will structure a process that keeps two key elements in mind. First, the process must consider the terms associated with each of the outstanding debts. This means knowing which of the vendors have 30-day payment terms, and which provide longer payment periods. Using those terms as the basis for arranging the payment schedule, the company can create an ongoing procedure that makes sure payments are issued in a manner so they are received by the vendors in time to be received and posted to their accounts within the payment terms. This means no late fees or additional interest charges are applied to the account balances by those vendors, effectively saving the company money.
The second aspect of accounts payable aging should be kept in mind when designing the accounts payable aging schedule is the need to balance payable levels with the finished inventory. This simply means that payments are issued to vendors in line with the sale of the finished inventory, so that money from the sales can be used to settle the debts incurred as part of the business operation. Here, care must be taken to negotiate payment terms with vendors that are in line with the typical turnaround in production and the sales of finished goods.
When successfully managed, accounts payable aging minimizes the possibility of carrying significant debt that is outside the scope of the payment terms. This in turn helps to protect the integrity of relationships with vendors as well as allow the business to enjoy a favorable credit rating. At the same time, the accrual of a large amount of late fees or penalties on those outstanding invoices is avoided, which in turn helps to keep the bottom line of the company a little healthier.
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