Question

Explain why an increase in accounts payable can be a way of financing business operations?

Answer 1

To understan this first we should know, what is accounts payable and how it can be created?

Accounts payable: When companies do businesses they purchase materials from suppliers at a credit for certain period which is for short term, this short term of availing credit is known as accounts payable.

Account payable comes under current liabilities head in the balancesheet of a company and considered as a leverage for the company.

Accounts payable can have a big impact on the company's profitability. There aretwo primary ways that accounts payable affect company profitability are the company's relationships with its suppliers or vendors and the company's cash flow.

If we have good accounts payable management we can increase our profitability and also can escape our business from going into cash crunch.

How can we do this?

We can do this only by maintaining good relationship with suppliers by paying bills on time so that they are assured that the company pays bills on time then only we can get goods on credit and can save our working capital from going into inventory.

To run every business day to day operations we need to have some cash in hand to meet daily expenses of the business, the amount requires large for the large businesses. So if we have the facility to buy materials from suppliers it can act as a financing because we are not paying money right now, we are taking about a year time from the supplier to clear dues. So for that period of time we have leverage to pay credit.

This is a reason why an increase in accounts payable considered as a way of financing business operations.