How can you save time and money by knowing the difference between accounts payable and notes payable? Plus, how do you put that knowledge to work?
If cash is king, then credit is your powerhouse. Managing accounts payable is about efficient operations and strong current performance. When you make the best use of notes payable, you open the floodgates to growth, increased control, and higher profits.
Why Does That Matter to Your Business?
Many business owners and managers often assume the two terms — accounts payable and notes payable — are interchangeable, but they are not. Accounts payable is more to do with daily, weekly, and monthly business operations. Notes payable is a much broader concept enabling greater long-term planning, improved control and efficiencies, and faster growth while reducing current liabilities. The end result is, of course, higher profit.
Make full use of the difference, and you will have a strategy that can take your business stratospheric. And that’s why this article on accounts payable and notes payable will help you to:
- Use the differences between accounts payable and notes payable as the foundation of that strategy.
- Use the essential benefits of notes payable to deliver on the strategy.
- Link those benefits to a powerful purchase-to-pay process, so you reap the rewards of applying the difference to the strategy.
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If Planning and Daily Control Fall Short
Accounts payable and notes payable are both company debt but fall into separate and distinct categories. Accounts payable (AP) in the general ledger hold short-term debt resulting from purchasing goods and services, and they are due to be paid off in 30 days or so. Vendors assume their invoices will be paid, so they do not require any collateral security. As long as their invoices are paid in a timely manner, they will continue to satisfy your new orders.
Notes payable (NP), on the other hand, are typically long-term liabilities, with a maturity date of either one year or less (short term) or more than one year (long term). They are written agreements (in effect, a written promise) detailing repayment terms, including the principal amount issued by the lender, interest payable, and any security. The agreement encapsulates those elements in a formal lending agreement between the borrower and lender. Notes payable to banks are typical, but they may also be paid to other financial institutions. Because there is a specific due date when the amount due is to be repaid on that future date, the borrower knows the exact time period for using the credit and the specific amount of money to be repaid. Notes payable accounting is, therefore, recorded and reported differently from accounts payable accounting.
The Head-to-Head Differences: Accounts Payable vs. Notes Payable
What Are the Benefits of Long-Term Notes Payable? (LTNP)
Because an LTNP agreement is paid with interest at an agreed rate, offering collateral as security is often not part of the agreement. This gives the business the funding it needs without relinquishing any control over how those funds are used and without the need to get pre-approval from its investors. It makes forward planning easy, so budgeting to handle the eventual repayment is smooth.
Current assets are used for current operations, so you do not need to hold them back to pay for future growth, developing new products, or introducing innovations. The LTNP provides the funding. Because of that, the business lowers any risk of short-term loan default, increases its debt capacity, and, therefore, displays greater financial stability to the world. Another advantage of LTNP funding is that interest due can be deducted from this year’s tax liability, lowering the overall cost of capital financing.
LTNP funding means you can look far beyond day-to-day operations and how to pay for innovation and growth. By using LTNP credit, you actually improve everyday control while ensuring the innovations deliver on their goals. Costs go down, profits go up, and the liquid funds to settle the note when it becomes due can be planned for. In a nutshell, P2P makes the most of notes payable.
How Do Notes Payable Help Your Business Innovate and Grow?
We are going to focus on the purchase-to-pay process. P2P is a great way to use notes payable funds to get the benefits of this innovative process. Every business purchases products and services, but most still separate purchase and payment into separate functions. Businesses that introduce an integrated purchase-to-pay strategy lower their costs and improve operational control. Businesses where (i) several stakeholders, like departmental or site managers, make independent purchase decisions and (ii) where approving, tracking, monitoring, and payment of those purchases are also separate are missing out on savings in activities, time, and cost. The four basic areas of improvement you get from a P2P process are:
- Spend is optimized.
- Maverick spend is reduced or eliminated.
- Planned deliveries, resulting from properly organized and controlled ordering, prevent delays.
- Spending goals become universally visible.
When you invest notes payable value into introducing P2P, you immediately see efficiencies that result in lower costs. This leads to an increase in working capital, which you can then use elsewhere in your business. That’s an immediate win-win.
How Does Procure-to-Pay (P2P) Work?
P2P is also known as purchase-to-pay, eProcurement, and sometimes by the rhyming phrase, req2check. It is a system that integrates each step from requisitioning goods and services through selecting supplier(s), procurement, and finally, to payment.
Because it is comprehensive, it impacts many areas of operation. Many businesses operate across several sites and via separate departments that often replicate similar activities. It is common for the same goods and services to be needed by these separate departments and sites. So they can be requisitioned from the same suppliers. Each, then, generates its own supply chain. This is then repeated and repeated across each department or site. It leads to frequent errors that use up time and effort to resolve. A lack of both operational and accounting control becomes the norm.
The Steps of P2P Processes
But integrating everything into an effective P2P means corporate standards are maintained. P2P works like this:
- Identify goods and services to be ordered.
- Raise a requisition (purchase order)
- Review and approve each order. (Without an integrated system, review and approval are often ignored.)
- Integrate requisitions to create a complete purchase order with specific order and delivery details for each site or department.
- Select the appropriate supplier(s) based on known pricing, quality, and delivery standards.
- If there are no existing suppliers, create a list of potential vendors, and issue requests for bids.
- Add newly approved suppliers to the system.
- Raise the purchase order.
- Issue the purchase order to the supplier(s).
- Receive and approve deliveries.
- Receive supplier invoices.
- Check and approve supplier invoices.
- Input invoices into the procurement and account payable software systems.
- Approve invoice payments.
- Pay suppliers at the business’s discretion.
ZeroCater introduced a Chrome extension to their P2P. It made web browsing of vendor products quick and simple. It also simplified adding new vendors and supplies to the integrated catalog and cart. They now control, manage, and monitor deliveries through the deliverability add-on. A direct result is that invoice processing has been reduced 50-fold. They also have total visibility, maximum control, and total budget adherence. It became a natural part of daily activities for requisitioners to work to corporate compliance standards.
Be Relax, with more than 50 sites worldwide, saw 96% faster ordering, faster delivery, and quicker implementation. Individual supplier invoices reduced from 60 per location per month to one. Again, P2P delivered immediate and measurable results.
Be Relax, with more than 50 sites worldwide, saw 96% faster ordering, faster delivery, and quicker implementation.
The P2P Bottom Line
When you understand the difference between accounts payable and notes payable, it is easy to keep them separate and use the difference to the business’s advantage. The net result is you meet immediate needs and, like ZeroCater and Be Relax, deliver on your ultimate goals.
Accounts payable address working capital. Notes payable facilitate and empower your business’s future plans. Everyone sees improved processes and greater efficiencies, which lead to higher profits. Using a notes payable facility correctly gives the entire C-suite the ability to plan and make the most impactful decisions for the business and its future. That long-term funding relieves pressure on working capital so that it can do for the business what it was always intended to do. Cash is king for every day. Credit enables you to go stratospheric.
What Is the Powerful Takeaway?
You achieve maximum results using the real value of notes payable because you innovate and implement. Using P2P gives you a comprehensive process resulting in a smooth and efficient operation that keeps decision-making where it belongs: at the coalface. You maintain total visibility through every stage from requisition to final payment. That encourages everyone to meet operational standards, adhere to corporate compliance, and stay within budget.
All the improved efficiencies benefit both the company and its suppliers. P2P makes it easier for suppliers to meet on-time deliveries. That reduces their costs and allows you to renegotiate prices and terms.
Your working capital is less strained and more available for other immediate needs. It can also be allocated more easily to future budget plans, including settling the note.
Purchase-to-pay is powerful, and we hope you could relate each advantage and benefit to your own business. If you would like to arrange a free demo so you can learn more and discuss your thoughts and ideas with one of our experts, please click this link.