Accounts Receivable (AR) and Accounts Payable (AP) cycles are crucial components of a company's cash management and working capital.
Accounts Receivable (AR) Cycle:
1. Invoice generation: Create invoices for sales or services rendered.
2. Invoice distribution: Send invoices to customers.
3. Payment receipt: Receive payments from customers.
4. Payment processing: Record payments in the accounting system.
5. Follow-up: Follow up on overdue payments.
Accounts Payable (AP) Cycle:
1. Invoice receipt: Receive invoices from suppliers or vendors.
2. Invoice verification: Verify invoice accuracy and completeness.
3. Invoice approval: Approve invoices for payment.
4. Payment processing: Process payments to suppliers or vendors.
5. Payment recording: Record payments in the accounting system.
Key Performance Indicators (KPIs):
1. Days Sales Outstanding (DSO): Average days to collect AR.
2. Days Payable Outstanding (DPO): Average days to pay AP.
3. Accounts Receivable Turnover: Frequency of AR collection.
4. Accounts Payable Turnover: Frequency of AP payment.
Effective management of AR and AP cycles can improve cash flow, reduce bad debt, and optimize working capital.