Skipping the bill that month enables the company to keep that cash. So, at year-end the following year, the accounts payable will double to $200,000, and the cash on hand will increase by $100,000, equal to the amount it saved with the free month from its suppliers.
The math swings both ways, however. If the scenario were reversed and the suppliers cut the company's time to pay from 60 days to 30, the company's cash flow would take a big hit. Instead of getting a free month, it would effectively have to pay double one month to meet the new payment requirement.
How accounts receivable impacts cash flow
The suppliers in our scenario have their own cash flow considerations in setting how long they're willing to wait to receive payment. For the supplier, allowing a customer to wait a little while to pay is called an accounts receivable.
These short-term credits are recorded as current assets on the balance sheet and have an inverse impact on cash flow as accounts payable. Accounts receivable, therefore, is a use of cash.
You can think about it as the example above reversed. Let's say the supplier starts the first year with $50,000 in cash and accounts receivable of $100,000 (remember, this is money to be collected, not paid). If the supplier allows its customer to pay in 60 days instead of 30, the customer will get a free month, while the supplier must wait an extra 30 days to collect that cash.
