Overview

The main purpose of the accounts payable department is to process and account for invoices and cash disbursements. A variety of issues regarding the management and administration of the department affect its ability to serve this purpose effectively and efficiently. This series of articles examines these issues.

Organization and Reporting Structure

Issues of organization and reporting involve looking both within the department at staff responsibilities and outside of the department at the way the department fits into the rest of the organization. This discussion divides this into three areas:

· The organization structure within the accounts payable department.
· Responsibilities for managing accounts payable.
· How to structure accounts payable systems in a multidivisional organization.

ORGANIZATION STRUCTURE

Two factors constitute the organization structure of the department. One is the specific duties assigned to department staff and supervisory personnel. The other is the reporting relationships within the department.
Figure 8-1 illustrates the department organization structure for an accounts payable environment with four people in the department. Generally speaking, the larger the department, the greater the need to formalize its organization and structure. This formalization has several benefits:

· Department personnel know what is expected of them, so they know how to perform.
· Actual staff performance can be profiled against expected performance, facilitating performance evaluation and review.
· Lines of authority are clearly established, so that department policy can be clearly articulated and enforced.

MANAGING ACCOUNTS PAYABLE

Responsibilities for accounts payable management include
· Monitoring routine system processes such as voucher creation and cash disbursements.
· Ensuring the proper retention of reports, documents, and other records.
· Maintaining internal controls.
· Hiring and managing staff employees.
· Coordinating activities with related departments such as internal audit, purchasing, general accounting, and treasury.
· Reporting relevant matters to executive financial management.
· Executing their directives with respect to the above responsibilities.

In many smaller or divisional organizations, these responsibilities may not f> be carried out by a full time position. Whether this position is full or part time is usually dictated by transaction volume and the size of the department. For ex-f ample, with only a two-person department, it may be possible for the controller to perform all supervisory duties, eliminating the accounts payable supervisor position of Figure 8-1.



Larger organizations tend to have either a supervisor or a manager in charge of the accounts payable department. Managers are generally fully occupied by f the responsibilities outlined here; supervisors usually take on some of these responsibilities, but also perform some of the routine accounting functions as well. With an accounts payable department supervisor, the department management responsibilities are shared with the controller or director of finance.

ACCOUNTS PAYABLE SYSTEMS IN A MULTIDIVISIONAL

ORGANIZATION

Geographically disbursed businesses have a choice as to how they can approach accounts payable. They can allow independent divisions to have their own ac -counts payable processing or they can centralize part of the accounts payable processing. The key issue under either approach is where the important processes of (1) voucher approval, (2) voucher payment selection, (3) cash disbursements, and (4) bank reconciliation reside—centrally or remotely. The table in Figure 8-2 defines how these processes usually exist under either scenario.

Centralized Accounts Payable. Many multidivisional organizations centralize some portions of the accounts payable function to control both the operating costs and the organization's cash disbursements. The end result of this leaves only limited accounts payable responsibility to the divisional personnel. There are several advantages to this:
1. Cash Management. Centralization can enable an organization to better manage cash balances and float. For example, an organization with four divisions can generally operate a single disbursement account more efficiently and with a lower aggregate funds balance than if each division had its own separate disbursement accounts.
2. Improved Use of Organizational Resources. Centralization can help achieve some economies with respect to cash disbursements and check handling. Again, performing:

· Voucher selection,
· Check printing, and
· Bank account reconciliation

for these same four divisions could likely be accomplished with less resources if these duties were carried out by a single corporate department rather than four divisional accounts payable departments.

3. Control. Centralization helps the corporate organization achieve control over voucher approval and the disbursement of funds required to support divisional operations. In this respect centralization can reduce the possibility of collusion between divisional personnel and the vendor.

Figure 8-3 illustrates the flow of accounts payable processing in a centralized multidivisional environment. Most often this involves a corporate accounts payable system that the remote divisions access via telecommunications. The approval shown taking place at the corporate organization (Step 3 in Figure 8-3) is optional. The corporate accounting department's review of the prepayment register during payment processing can provide sufficient information such that this approval step is not absolutely necessary. However, a good accounts payable system will allow this approval step to be very easily instituted.



In implementing a centralized system, businesses may not always split the accounts payable functions as described here. For example, some organizations print checks only centrally, leaving the remote location(s) to perform voucher approval and voucher payment selection. As another example, some businesses try to centralize accounts payable processing by linking both a central, corporate accounts payable system and a remote accounts payable system running at the division. These hybrid scenarios generally compromise the benefits of centralized accounts payable processing and should be considered as candidates for improvement, either by further centralization or decentralization.

Next Month's topic: Decentralized Accounts Payable

About this article and the author:

Doug Potter is the owner of The Newport Consulting Group a professional management consulting organization that provides clients with information systems planning, selection, and implementation services. He can be reached at dpotter@newportconsulting.com or through his Web site, http://www.newportconsulting.com. Note: The contents of this article were excerpted from Mr. Potters book "Automated Accounting Systems and Procedures Handbook" Copyright 1991 by Douglas A. Potter, published by John Wiley & Sons, Inc. New York