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In the current business scenario, organizations and firms have a pressure to use the resources in a more optimized manner. Businesses cannot afford to spend their working capital on resources that do not provide valuable services and waste opportunities. Accounts payable is the money/cash owed by an organization to its vendors, which is under the liability column on the balance sheet of the organization.
Importance of the accounts payable department
When it comes to the process of optimizing the working capital of a firm in the UAE, increasing the accounts payable can be thought of as a great strategic plan. To be sure, many organizations are working on this strategic plan by trying to extend the payables to achieve maximum free cash flow as long as possible. Sadly, this is not always the solution, which is the most appropriate one. In certain cases, withholding payment will erode goodwill for the manufacturer, leading to slower delivery times, less willingness to repair defects and more burdensome terms of payments.
In order to identify such opportunities and deciding the appropriate course of action while facing difficult situations in UAE, a more strategic approach to the accounts payable is required to be adopted by the corporate organizations. A working capital-oriented approach should be designed by the accounts payable department by collaborating with other departments like purchases, sales, etc. It is much more than just processing the paychecks or invoices on a regular basis. It is more about adopting a working culture that has the aim of optimization of the account payables in order to free the working capital, which can ultimately aid in the growth of an organization.
Let us look at certain activities which can help optimize the accounts payable department in UAE and as a result, strengthen your working capital: –
1) Adopting paperless processes as much as possible
Digital payment bills can facilitate the experience of paying accounts and make the whole process much easier and smoother. There is no need to wait for them to be delivered to you physically. The physical paper bills can be misplaced or manipulated easily. The online digital versions have a lot of advantages. It can help you get the invoices and clear the payments on a timely basis. It is a greatly beneficial practice. Also, the vendors and suppliers should be advised to send their invoices through emails in a digital form as much as possible. The payments can easily be made through mobiles and computers.
2) Streamlining the accounts payable process
A robust and a common process for the time you receive an invoice to the time you clear the payment should be set up. It can be made more efficient by incorporating the learnings from the past mistakes taken place while following a particular process of the accounts payable department. One suggestion would be to maintain a common repository for all the invoices from where they can be accessed easily as and when required. Also, the invoices should be stored in an organized and sorted fashion as per the needs. They can be sorted either on the basis of the priority or date wise by default.
3) Setting up reminders
Sometimes in a busy month, it can be quite a common incident to forget about the due dates of some invoices. Setting up reminders prior to the due dates can help you never miss a deadline. These can also help to calculate the future expenses the firm is going to bear along with their calendar timelines. It can help plan some major investments ahead of time and use the funds wisely.
4) Tracking the archived data
Archiving the past invoices in an online location is a recommended practice. Details of the payments made, when they were made, to whom, etc. should be stored in one location either on cloud storage or computer storage. They can be of great help when filing the tax returns at the end of the accounting cycle. It can make the process very accurate and efficient.
5) Compiling and updating the contact information
The contact details of all the vendors and suppliers, such as phone numbers, email addresses, and office location addresses, should be collated and stored in a single location. Also, the vendors may want to reach you on a timely basis, so the contact information of your firm or organization should also be updated on all the communication mediums of the firm such as business cards, websites, blogs, social media platforms, etc.
6) Vendor selection and discounts
The accounts payables process becomes easier when the firm owes lesser money to the vendors. The vendor and supplier selection process should be done in such a way to select the ones that offer good discounts and have proper negotiable payment terms. Some vendors who ask for full advance payments can be risky to trust when dealing with them for the first time. Many vendors agree for discounts on negotiation if you are a regular purchaser and if you purchase in a bulk manner. This approach can help you save money in the long term.
7) Budgeting the expenses
Documenting and archiving the data, as mentioned in the previous steps, is essential as it helps to calculate an approximate figure which can be used to keep that much cash aside for the expenses when creating a budget. It helps to plan ahead of time and ensures the smooth functioning of the accounts payable department when clearing the invoices around their due dates.
8) Maintaining a cash reserve
Cash reserves are always recommended. On unforeseen circumstances of low-income months, the reserves can be extremely helpful to clear any payment dues and rule out any possibility of an increase in liability of a firm during difficult times. A business savings account where you can on a monthly basis contribute some amount from the earning can help you maintain a reliable cash reserve to be of help in tough times.
By improving the accounts payable processes and streamlining the management processes, organizations can create a great working capital culture for the coming years.