As companies expand and add more entities, the complexity of their accounting processes increases, leading to the need for an overhaul of intercompany transaction processes. This may arise due to a variety of factors such as mergers and acquisitions, expansion across new geographies, or the introduction of new product lines. This growth inevitably results in a decision point: centralized vs decentralized accounts payable?
Deciding whether to centralize or keep accounting processes decentralized is a crucial decision that can impact resource allocation, vendor management, invoicing, collections, and payroll processing. It is essential to consider the increasing number of resources that come with each new entity. This includes vendors to pay, customers to invoice and collect from, and employees on the payroll.
Managing these resources can become complex and time-consuming, leading many companies to explore centralizing their payable processing. By doing so, they can avoid redundant and inefficient operations, ultimately streamlining their accounting processes.
In this blog post, we will explore the pros and cons of centralized vs decentralized accounts payable, with a focus on the benefits of streamlining operations and avoiding redundancy through centralization.
A list of topics covered in this blog, jump ahead by clicking the appropriate link:
- What is centralized accounts payable processing?
- What is decentralized accounts payable processing?
- The pros and cons of centralized accounts payable at a glance
- A breakdown of the benefits of centralized accounts payable
- A breakdown of the challenges of centralized accounts payable
- The pros and cons of decentralized accounts payable at a glance
- A breakdown of the benefits of decentralized accounts payable
- A breakdown of the challenges of decentralized accounts payable
- Introducing a centralized accounts payable solution
Let’s define what we mean by centralized and decentralized accounts payable
What is centralized accounts payable processing?
Centralized accounts payable processing refers to a method of managing accounts payable activities from a single location or team that is responsible for processing invoices, making payments to vendors, and maintaining payment records for all entities within an organization. This approach involves consolidating the accounts payable activities of various departments or locations into a single department or team, which is responsible for managing all vendor relationships, invoices, and payments for the entire organization.
In this process, all the invoices and payment requests from different departments or locations are sent to a central team for processing. The central team verifies and approves the invoices before processing the payments to the vendors. By centralizing the accounts payable processing, companies can benefit from economies of scale, reduce redundancies and errors, streamline payment processing, and gain better control over their cash flow.
What is decentralized accounts payable processing?
Decentralized accounts payable processing refers to a method of managing accounts payable activities in which different departments or locations within an organization are responsible for managing their own vendor relationships, invoices, and payments. In a decentralized accounts payable process, each department or location typically has its own accounts payable team responsible for processing invoices, making payments, and maintaining payment records.
This approach can be useful in large organizations with multiple locations or business units that have different vendor relationships and payment terms. Decentralization allows for greater autonomy and flexibility for each department or location to manage their own accounts payable activities according to their specific needs and requirements.
However, decentralized accounts payable processing can lead to inefficiencies, such as duplication of efforts and inconsistent payment processing across different departments or locations. It can also make it difficult to gain a complete and accurate view of the organization’s financial position. Therefore, some companies may choose to centralize their accounts payable activities to improve efficiency, standardize processes, and gain better control over their cash flow.
A quick overview of the pros and cons centralized accounts payable processing
A breakdown of the benefits of centralized accounts processing
1. Eliminates redundant processing at separate locations
Centralizing accounts payable processes not only eliminates redundant work at separate locations but also provides additional benefits. In organizations with multiple entities operating within the same space, such as restaurant franchises or gas stations, branches within the same region may be working with the same vendors and customers.
By centralizing accounts payable processing, these entities can consolidate their vendor relationships and negotiate better pricing and terms, ultimately leading to cost savings for the organization. Additionally, centralization can provide better visibility into spending patterns and enable the organization to make more informed financial decisions.
2. Ability to negotiate better rates or prices for purchases across branches
Centralized accounts payable processes provide the ability to negotiate better rates or prices for purchases across branches. By consolidating purchasing data from all branches, the corporate head office can leverage the collective purchasing power of the organization to negotiate volume discounts and better pricing with vendors.
This can lead to significant cost savings for the organization, which can be reinvested in other areas of the business. Additionally, centralization allows for better tracking and analysis of purchasing data, which can help identify opportunities for further cost savings and process improvements.
3. Introduce consistency across records and accounting errors and duplications
Centralizing accounts payable processes not only presents an opportunity for cost reduction but also ensures consistency in recordkeeping and coordination throughout the entire process. By having a centralized system, companies can reduce the risk of errors and duplications by having a single source of truth for all accounts payable data.
Moreover, a centralized system allows for better coordination and training of staff members, ensuring that everyone operates in a similar manner and adheres to standardized processes. This can help reduce redundancies, disagreements, and errors across different departments or locations, leading to greater efficiency and accuracy in accounts payable management.
4. Lower the risk of missed payments with consolidated invoicing
Centralized accounts payable processes can lower the risk of missed payments by using consolidated invoicing. When vendors work with customers who have a centralized payables department, they can submit all invoices to a single location, which reduces the likelihood of invoices being lost or overlooked. This centralized approach provides vendors with greater confidence that their invoices will be processed in a timely and accurate manner.
Additionally, consolidated invoicing can simplify the payment process for both the customer and the vendor, as it reduces the need for multiple payments to be processed across different locations or departments. This results in a more streamlined and efficient accounts payable process for all parties involved.
5. Provides better visibility into spending patterns and enables informed financial decisions
By consolidating accounts payable data from across an organization, companies can gain a comprehensive view of their spending patterns, including how much they spend on different vendors and types of purchases. This information can be used to identify opportunities for cost savings, negotiate better pricing with vendors, and make informed financial decisions.
Additionally, centralizing accounts payable processing allows for better tracking and analysis of financial data, which can help identify areas of overspending or inefficiencies in the process. Overall, centralization provides companies with the data and insights they need to make informed financial decisions that support their long-term growth and success.
6. Reduces manual labour and streamlines processes
Centralized accounts payable processing can help reduce manual labour and streamline processes by automating tasks such as invoice data entry and approval workflows. By using electronic invoicing and approval systems, manual data entry and paper-based processes can be eliminated, reducing the time and effort required to process invoices.
In addition, automation can help reduce errors and improve accuracy by minimizing the need for manual intervention. This streamlined approach can free up staff time to focus on more value-added activities, such as strategic financial analysis, and enable the organization to operate more efficiently overall.
7. Enables easier tracking and analysis of data for decision making
Centralized accounts payable processing provides organizations with easier tracking and analysis of data, allowing for better decision-making. By consolidating data from multiple locations or entities, a centralized system can provide a comprehensive view of the organization’s spending patterns and trends.
This can help identify areas where cost savings can be achieved or where the organization may be overspending. With easy access to this data, organizations can make informed financial decisions and implement changes to improve their bottom line. Additionally, a centralized system can provide real-time reporting and analytics, allowing for more accurate and up-to-date information for decision-making.
8. Enhances financial control and compliance
Centralized accounts payable processing enhances financial control and compliance by creating a standardized process that ensures all transactions are properly authorized and documented. This helps to prevent fraud and ensures that the organization remains compliant with relevant regulations and internal policies.
Additionally, centralized processing enables more efficient monitoring of financial activities, which can help detect and prevent any irregularities or errors before they become larger issues. With a centralized system, auditors can easily access all necessary records and data to conduct audits and ensure compliance with regulations. Ultimately, enhanced financial control and compliance can help to protect the organization’s reputation, increase stakeholder trust, and mitigate potential risks.
9. Improves vendor and customer relationships
Centralized accounts payable processing can also improve vendor and customer relationships. By having a centralized system, vendors can receive consistent communication and payment terms, which can lead to greater trust and reliability in the business relationship. Additionally, customers can receive more accurate and timely invoices, leading to better payment management and improved vendor relationships.
With a centralized accounts payable system, both vendors and customers can benefit from greater transparency, better tracking of transactions, and more efficient communication, ultimately leading to stronger business relationships and increased satisfaction. This can help organizations build a positive reputation in their industry and attract more business in the long term.
The potential challenges of centralized accounts payable processing
1. Requires significant initial investment
Implementing a centralized accounts payable system requires a significant initial investment in technology, personnel, and training. The cost of purchasing and implementing new software and hardware, along with the cost of training staff on the new system, can be substantial. Additionally, there may be a need to hire additional personnel to manage the new system, and this can add to the overall cost.
However, despite the initial investment, centralizing accounts payable can lead to long-term cost savings through increased efficiency, reduced errors and redundancies, and better negotiation with vendors. Organizations must carefully weigh the costs and benefits of centralization before making a decision.
2. Loss of local control, as decisions related may be made at the corporate level
Centralized accounts payable processing can result in a loss of local control since decisions related to accounts payable may be made at the corporate level rather than at individual branches or locations. In a decentralized system, local branches or departments have more autonomy in decision-making related to accounts payable, such as selecting vendors and negotiating terms.
However, in a centralized system, these decisions are typically made at the corporate level, which can result in a loss of flexibility and local control. This can be a disadvantage for organizations that require a more localized approach to their accounts payable processes. To mitigate this risk, it is important for companies to establish clear communication and collaboration between corporate and local branches to ensure that decisions are made in the best interest of the organization as a whole.
3. Communication and coordination can be challenging during transition
The implementation of a centralized accounts payable process can be a complex undertaking that requires effective communication and coordination between different departments and locations. During the transition, there may be challenges in ensuring that all stakeholders are aware of the new processes and procedures.
There may also be some resistance to change from employees who are used to working in a decentralized system. To mitigate these challenges, it is important to have a clear communication plan in place that outlines the benefits of centralization and provides regular updates on the progress of the transition. Additionally, providing adequate training and support to employees can help ensure a smoother transition to the new system.
4. Risk of data breaches if centralized system does not have advanced security settings
One potential downside of centralized accounts payable processing is the risk of data breaches if the centralized system does not have advanced security settings in place. With all financial data consolidated in a single location, the consequences of a security breach could be significant, leading to loss of sensitive data, financial loss, and reputational damage for the organization.
To minimize the risk of data breaches, it is important to implement robust security measures such as encryption, access controls, and regular system updates. Additionally, staff members should be trained on best practices for data security to ensure that all individuals with access to the system are aware of the risks and are taking appropriate precautions to safeguard sensitive data.
5. May limit the ability of individual branches to tailor processes to their specific needs
One potential drawback of centralized accounts payable processing is that it may limit the ability of individual branches or locations to tailor their processes to their specific needs. With a centralized system, decisions related to accounts payable may be made at the corporate level, and there may be less room for local customization.
This can be particularly challenging for organizations with unique processes or requirements that are specific to a particular location or business unit. However, many centralized accounts payable systems offer a certain degree of flexibility, and organizations can work to strike a balance between centralization and customization to meet their specific needs.
6. Increased reliance on technology can be a disadvantage if there are technical issues or system failures
Centralized accounts payable processing relies heavily on technology, which can be a disadvantage if there are technical issues or system failures. In such instances, delays can occur, and the process can come to a halt until the issue is resolved. Technical difficulties can also lead to the loss of data, which can be a significant setback.
Therefore, it is crucial to have a robust and reliable system in place, as well as backup procedures and disaster recovery plans, to mitigate the risk of system failures. Additionally, proper training and support for employees who use the system are essential to ensure that they are equipped with the knowledge and skills to manage any technical challenges that may arise.
A quick overview of the pros and cons of decentralized accounts payable processing
The benefits of decentralized accounts processing
1. Operating in multiple countries may be easier if decentralized
Decentralized accounts payable processing can make operating in multiple countries easier. This is because companies that operate in different countries may find that separate entities have different standards or needs, making it challenging to manage a centralized system. Decentralization allows each entity to manage its own accounts payable processes, which can help ensure that each location adheres to local laws and regulations.
Additionally, it can provide greater flexibility to respond to local market conditions and can help reduce the administrative burden on the central finance team. By allowing each location to tailor its processes to its specific needs, companies can improve the efficiency of their accounts payable processes and improve overall financial management.
2.Different countries may require different levels of security
Having different levels of security requirements in different countries can be a challenge for a centralized accounts payable processing system. However, a decentralized system can be more flexible and responsive to the specific security needs of each country. For example, a country with high levels of cyber-attacks may require more advanced security measures, while a country with lower security risks may only require standard security measures.
By allowing each country to manage their own accounts payable processes and security measures, a decentralized system can provide a tailored approach that meets the specific needs of each location, ensuring compliance with local regulations and minimizing the risk of security breaches.
3. Parent companies may require each child company to self-manage
In a decentralized accounts payable processing system, each child company or subsidiary is responsible for managing its own accounts payable processes. This can be a benefit in cases where the parent company wants to empower each child company to make decisions about their own financial management.
By allowing individual entities to manage their own accounts payable processes, they have greater control and flexibility over their finances. This can help to foster a sense of autonomy and ownership among subsidiary companies, which can be beneficial for their overall performance and productivity. Additionally, it can reduce the workload on the parent company, as they do not have to manage every aspect of the accounts payable process for each subsidiary.
4. Decentralization allows for greater flexibility in tailoring processes to local needs
Decentralized accounts payable processing allows greater flexibility in tailoring processes to local needs because each branch or subsidiary can develop processes and procedures that best suit its specific requirements. This is particularly important when operating in different regions with unique regulations, cultures, and business practices.
With decentralized AP processes, each location has more control over how they handle their financial operations and can adjust accordingly. This approach also allows for faster decision-making and problem-solving since the local team has a better understanding of the specific challenges and opportunities in their region. By tailoring processes to local needs, companies can improve efficiency and minimize disruptions while maintaining a standardized overall approach.
5. Each entity can make decisions independently without needing to consult with a central authority
The decentralized accounts payable processing allows each entity or location to have autonomy in decision-making related to financial processes. This means that there is no need for a central authority to make decisions for every location. Each entity can have its own decision-making process and can customize its processes to meet its specific needs.
For example, a location in a remote area with limited access to technology may have different accounts payable processes than a location in a more urban area. The flexibility to tailor processes to local needs can result in more efficient and effective financial operations for each entity.
6. Decentralized systems may be easier and quicker to implement
Decentralized systems may be easier and quicker to implement compared to centralized systems, as each entity can set up its own accounts payable process. The local team can work within their own timelines and resources to establish and manage their own systems, without the need to wait for approvals or support from a central authority.
This allows for faster decision-making and implementation, which can be particularly important for businesses that need to respond quickly to market changes or regulatory requirements. Additionally, since each entity has its own process, it may be easier to troubleshoot and resolve issues quickly, without requiring the involvement of a central authority.
7. Can result in greater employee autonomy and job satisfaction
Decentralized accounts payable processing may result in greater employee autonomy and job satisfaction because it allows for more decision-making power to be distributed among the local teams. With a decentralized approach, employees at the local level have more autonomy and responsibility in making financial decisions that affect their day-to-day work.
This can lead to a greater sense of ownership and pride in their work, as well as increased job satisfaction. Additionally, employees may feel more empowered to innovate and improve processes since they have greater flexibility to tailor processes to their specific needs. Ultimately, this can result in a more engaged and motivated workforce.
8. Can promote innovation and idea generation at the local level
Decentralized accounts payable processing can promote innovation and idea generation at the local level by allowing local employees to have a greater say in the processes and procedures that they use on a daily basis. When employees are given the freedom to make decisions and suggest improvements, they are more likely to feel invested in the success of the company and its processes. This can lead to increased job satisfaction, motivation, and productivity.
Additionally, local employees may have a better understanding of the specific needs and challenges of their location, which can lead to more tailored solutions and innovations that benefit the entire organization. Overall, a decentralized approach can encourage a culture of innovation and continuous improvement, which can help the company stay competitive and adapt to changing market conditions.
9. Reduces the risk of a single point of failure in the system
Decentralized accounts payable processing can help reduce the risk of a single point of failure in the system. In a centralized system, if there is a technical issue or system failure, the entire payment process can come to a halt, resulting in significant disruptions to the business.
However, with a decentralized system, if one entity experiences an issue, the impact is limited to that entity, and the rest of the system can continue to function. This can help ensure that business operations are not significantly impacted by system failures or other disruptions, reducing risk and enhancing business continuity.
The challenges of decentralized accounts payable processing
1. Limited visibility and control over spending patterns
One of the challenges of decentralized accounts payable processes is limited visibility and control over spending patterns. With separate entities managing their own payments, it can be difficult to get a clear overview of how money is being spent across the organization. This can make it harder to identify potential issues or areas for improvement, and can also lead to inconsistencies in spending practices.
Without a centralized system for monitoring spending, it can be challenging to enforce spending policies or ensure that all departments are adhering to the same standards. This lack of visibility and control can ultimately impact the overall financial health of the organization.
2. Inefficiencies due to duplication of effort and inconsistent processes
Decentralized accounts payable processes can lead to inefficiencies because each branch or entity may have its own processes and procedures for handling invoices and payments. This can result in duplication of effort and inconsistent processes, which can lead to errors, delays, and ultimately, increased costs. Additionally, without a centralized system for tracking and monitoring payments, it can be difficult for the organization to gain visibility into its spending patterns and identify areas for improvement.
The lack of standardization and consistency can also make it challenging to implement best practices and ensure compliance with regulatory requirements. Therefore, it’s essential to ensure that proper communication and collaboration channels are established, and standardized processes are in place, even in a decentralized system, to minimize inefficiencies and ensure consistency across the organization.
3. Difficulty in consolidating financial information across multiple entities
Decentralized accounts payable processing can lead to difficulty in consolidating financial information across multiple entities. With each entity having its own processes and systems, it can be challenging to obtain and aggregate financial data from various sources. This can lead to delays in reporting, inaccurate financial information, and difficulty in making informed decisions based on the consolidated financial data.
It also poses a challenge for auditors as they have to work with multiple sets of financial data to ensure compliance and accuracy. Without a centralized system, it may require significant effort and time to collect and consolidate financial data from multiple sources.
4. Increased risk of errors, fraud, and compliance issues
Decentralized accounts payable processes can increase the risk of errors, fraud, and compliance issues. When each entity or branch manages its own accounts payable, it can be challenging to ensure consistent processes and procedures are followed. This can lead to errors in data entry, duplicate payments, or missed payments, which can cause financial losses and affect business relationships with vendors.
Additionally, it can be harder to detect and prevent fraud, such as fake invoices or payments to fictitious vendors, since there is less oversight and control over the entire process. Compliance with financial regulations and company policies can also be more difficult to ensure, leading to potential legal and financial consequences.
5. Lack of standardization in processes and systems
Decentralized accounts payable processing can lead to a lack of standardization in processes and systems, which can be a significant challenge for organizations. Without centralized oversight, individual entities or branches may develop their processes and systems that work best for them, leading to a lack of consistency across the organization. This can cause confusion, delays, and errors when trying to consolidate financial information or compare data between different entities.
It can also make it challenging to implement standard policies and procedures, train employees, or identify areas for improvement. Standardization is essential to maintaining efficiency and accuracy in financial processes, and the lack of it can be a significant disadvantage of decentralized accounts payable processing.
6. Difficulty in managing vendor and customer relationships
In a decentralized accounts payable process, each entity may manage its own vendor and customer relationships. This can lead to difficulties in maintaining consistency and standardization in communication and processes with these stakeholders. For example, different entities may negotiate different terms with the same vendor, resulting in varying pricing and payment schedules. This can lead to confusion and potentially strain relationships with vendors or customers. Additionally, it can be challenging for a central authority to effectively manage and maintain these relationships if each entity has its own unique approach.
7. Limited ability to leverage technology and automation
In decentralized accounts payable processes, each entity may have its own technology solutions or systems in place, making it challenging to leverage technology and automation across the organization. This can result in manual and time-consuming processes, which can increase the risk of errors and decrease efficiency.
For example, if each entity is using a different accounting software or payment processing system, it may be difficult to integrate these systems and automate processes such as invoice processing or payment approvals. This can lead to delays and errors, as well as a lack of visibility and control over the overall accounts payable process. In contrast, a centralized accounts payable system allows for greater standardization and the ability to leverage technology and automation for increased efficiency and accuracy.
8. Increased administrative burden
Decentralized accounts payable processes may result in an increased administrative burden due to the need to manage multiple processes and systems. With multiple entities managing their own accounts payable, there may be a greater need for oversight and coordination, which can require additional resources and time. This can lead to increased costs and reduced efficiency in the overall accounts payable process.
Additionally, the decentralized approach may require additional training and support for employees who are managing their own accounts payable processes. This can further add to the administrative burden and costs associated with the decentralized approach.
9. Inability to take advantage of economies of scale
Decentralized accounts payable processes can make it difficult for organizations to take advantage of economies of scale, which is the concept of achieving cost efficiencies by increasing the volume of production. When processes and systems are decentralized, each entity may be responsible for handling its own payments, which can result in smaller transaction volumes.
As a result, organizations may be unable to negotiate lower prices with vendors due to reduced purchasing power. Additionally, the cost of implementing and maintaining separate systems across multiple entities can be higher than that of a centralized system. This increased administrative burden can ultimately lead to higher costs for the organization.
Introducing centralized accounting Payable solutions that integrates with Dynamic 365
Multi-Entity Management is a centralized solution that works with multiple partners for Dynamics 365 solutions to connect accounts payable processing across multiple entities. This solution allows organizations to manage their financial transactions and accounting processes across multiple legal entities, with the added benefit of automating and streamlining these processes.
With Multi-Entity Management, organizations can simplify their accounts payable process, reduce errors, and gain greater visibility and control over their financial operations. Additionally, this solution integrates seamlessly with other Dynamics 365 applications, providing a comprehensive solution for managing all financial aspects of an organization.