Page 56 - Accounting Best Practices

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3–18 Centralize the Accounts Payable Function
First, the accounting staff at each location requires a supervisor, so the sum total
of supervisors at all the locations can be substantial. Second, there can be prob-
lems with suppliers sending invoices to the wrong locations. This is a particular
problem when the subsidiaries all have the same or similar names, since it is dif-
ficult for a supplier to figure out which location is the correct one to which a bill
should be sent. The problem is exacerbated if a supplier ships to several company
locations and then must issue a separate invoice to each location, since it is con-
fusing to issue billings when not only the company names are identical, but also
the goods shipped to all of them. Third, the many accounts payable departments
all require training and auditing to ensure that they all process payments in the
same manner. If a company does not do this, it is likely that discounts will not be
taken or that payments will be made without proper authorization. Finally, there
is a lack of control when the accounts payable function is widely distributed.
Local management can interfere with the payable process to make payments to
themselves or to entities they control, while still giving the appearance of good
local controls. All of these problems can be either eliminated or mitigated by
using a central accounts payable facility.
This facility does not have to be near any other company locations. It pays all
supplier invoices, using a single computer system and a single accounting data-
base, and operates under the control of a small, unified group of managers. It has
multiple advantages. First, there are far fewer managers, since there is only one
group of people to control. Second, there are no problems with supplier invoices
and related information disappearing, because all invoices are sent to the one pro-
cessing location. If a supplier incorrectly sends paperwork to the wrong location,
all facilities know where it must be forwarded, so the documents always arrive at
the correct point (though they may take a roundabout route to get there). Third, all
accounts payable activities can be easily monitored and corrected, since the audit-
ing personnel only have to review one facility. Finally, there is better control over
the process, since the accounts payable function is divorced from local control;
there is no way for a local manager to influence payments. All of these advantages
have a single result—lower cost, primarily through an overall reduction in the
number of personnel. It has been proven many times that a single, centralized
accounts payable function is considerably cheaper than a dispersed function.
Despite all these advantages, some companies balk at centralizing because of
protests by local managers. They claim that some payments must be made
locally, because some payments are cash-on-delivery, in cash, or require such
short payment intervals that the central facility cannot respond in time. They are
correct. However, this is such a small proportion of the bills at most facilities that
a local plant can get by with a few checks per month, which are drawn on a sepa-
rate bank account in which the company keeps a very small cash reserve. By lim-
iting the size of local payments, a company can limit its exposure to any unwar-
ranted local payments. By meeting local management demands partway, a
company can still centralize the bulk of its payments while continuing to allow