Accounts Payable News^®

Often met with equal feelings of enthusiasm and uncertainty, the centralisation of the financial operations of an organisation has its fair share of supporters and detractors. While it’s relatively easy to see the benefits centralisation can bring, it would be foolish to implement such a radical shift without first studying all the ramifications.

One of the most important things to remember is that each organisation is unique and that therefore centralisation shouldn’t be seen as a goal in itself. Rather the focus should be on the benefits it would bring as part of the overall business plan.

5 Main Benefits:

1. Each branch of the organisation can concentrate on the main business function, and not be distracted by accommodating financial requirements.
2. Enables greater corporate visibility. This is extremely important when considering an organisation’s exposure to risk, which was a recurring issue at the start of the recession in 2008, together with a lack of visibility. This created a working environment where there was a lack of liquidity and a knowledge vacuum.
3. Grouping several smaller functions under one umbrella maximises buying power and leverage. What one small branch is able to achieve in terms of corporate discounting etc, is frequently very different to what a larger, centralised hub can achieve.
4. Enables tighter efficiencies and reduced cost. Rather than duplicating resources across an organisation, departments such as AP or AR can be housed in a central area.
5. Increases liquidity, with direct impact on the organisation’s corporate assets.

It’s worth remembering that the implementation of a fully centralised AP department starts from a different base line for each organisation – therefore it should be seen as an evolutionary process. However, having the buy-in from top management is critical. Accounts Payable is often seen as a “service department” and therefore securing the level of support – both financial and professional needs a strong business case.

So what does it involve? Where should you start?
Depending on the size of the organisation, the best place to start is with cash flow. Rather than moving to a centralised banking system in one go, it’s probably preferable to stay with the local banking partners initially. However, this should be accompanied by a monthly or weekly sweep across the organisation and drop the cash into a pre-determined central bank. Once this system has been established, the next logical step would be to make sure that the local banks used are the same as the one chosen centrally. In doing so organisations should consider appropriate facilities for domestic, pan European and cross currency payments.

Once an organisation gets to this stage, a company should also put in place cash forecasting in order to be able to manage funding and investment, as well as any foreign exchange exposure. In organisations where there is a substantial flow between different subsidiaries, longer term funding should also be managed centrally. Going one stage further, centralisation can take over the complete handling of the AP and AR function.

Finally, centralisation offers the opportunity for finance departments to expand their role so that it becomes more of a business partner for other activities. This can involve moving into advanced risk management, such as commodity, credit and operational risk and playing a more strategic role in the management of corporate liquidity.

So why aren’t more departments centralised?

• Resource constraints – in terms of manpower, logistical and financial
• A highly fragmented and localised existing environment
• An operationally inefficient department, with many manual processes, blocking the path to change.
• Difficulty in getting senior level buy-in when compared to other demands on resources.
• Fear of change.
• A poor understanding or response from other business units.

In today’s less than cash rich environment, the business case for centralisation is compelling. Usually the shift away from localism pays for itself within six months to a year. In addition there are qualitative benefits that can be realised, for example, improved compliance, security and control and access to consolidated information, giving a clear picture of the overall health of the operation. Above all, for the success of the business change, the people involved have to have, or be made to have – a clear understanding of how it fits in with the organisation’s overall goals.