Question

what are the advantages and disadvantages of centralized and decentralized A/P and disbursement system?

Answer 1

A company generates accounts payable when a vendor or supplier allows it to purchase products or services on terms instead of paying upon delivery.  These terms are also referred to as trade credit or supplier financing.

Centarlized Processing

A centralized accounts payable system aggregates all of the accounts payable functions together in one centralized location with one staffing group. The staff performs the functions of invoice or bill receipt, purchase order compilation, trade credit approvals and agreement tracking, and bill payment processing. Centralized account payables arise from payables inputted, tracked and paid out of a centralized system.

Advantages of Centralized System:

1. Cost Reduction- The volume derived from bulk purchasing from one central purchasing department versus smaller purchases from numerous branch offices can have the net effect of reducing per unit purchase cost down throughout the entire organization.

2. Improve Customer Relations- Centralizing helps to eliminate confusion and costs in the cases where a supplier services multiple locations and is required to send a separate invoice to each location. Similarly, even when a customer purchases goods from three of your locations, they can receive a single invoice – not three separate ones – from your centralized invoicing staff.

3. Save time & money- If time is money, then centralized accounting can save a lot of both. Monthly closings can take days, so the more efficient the procedures are, the more you will save. With centralized accounting, staff can close multiple locations with a single process. Without it, it’s inevitable that some locations will be less efficient than others due to different policies, training, staff availability and management skills. Inevitably someone will be late in forwarding results to headquarters, which can delay the close.

Disadvantages of Centralized System

The principal disadvantage of a centralized A/P anddisbursement system is its potentially negative impact on payee relationships.Centralized systems may result in delayed payments to vendors and suppliersand/or lost discount opportunities. Technology developments and improvedaccess to information have reduced some of these problems. There is also aneed for coordination between the central A/P department and the firm’s fieldoffices to resolve payment disputes

Decentarlized Processing:

In a decentralized system, the A/P and disbursement functions are managed at thelocal or regional level. Field office managers approve invoices for payment, issuepayments, and reconcile accounts. Additionally, payments are often made througha local or regional bank. Decentralized systems are often the result of mergers andacquisitions where the A/P and disbursement systems of the merging firms have notbeen combined

Advantages of Decentralized System:

1. Decentralized accounting system is for companies who operate in multiple countries with network environments that are less than consistent. In these type cases, a centralized system can be cost prohibitive and tough to create/manage logistically.

2. This system gives greater autonomy to field office managers. As a result, the primary advantage is improved relationships with vendors andsuppliers because items clear quickly and disputes can be resolved locally. Inaddition, it is easier to take advantage of discount terms that require paymentsto be made in a shorter time frame (typically 10 days)

Disadvantages of Decentralized System:

1. The primary disadvantage of a decentralized system are theloss of control over information (possibly resulting in delayed payments); thelost opportunity to concentrate funds, reduce borrowing expenses, increaseinvestment returns; and the increased likelihood of unauthorizeddisbursements. Other disadvantages include the cost and complexity ofredundant systems; loss of opportunities related to strategic sourcing anddiscounts; the increased possibility of excess or idle balances at the localbank level; increased difficulty in obtaining information about the daily cashposition and cash outflows; difficulty in determining overall spend by vendortype; and increased transfer, reconciliation, and administrative costs