Procurement usually has its closest relationship with the finance department. Unfortunately, that relationship can also be the most challenging.
For so long procurement was viewed as the less important little brother of the finance department. However, over the last two decades procurement has earned its reputation as a critical business function in its own right.
The challenging business environment that has emerged recently has thrust the function procurement further into the spotlight. As sales and other revenue streams dried up, procurement (or saving money) became one of the only the true profit centers left within an organization.
Procurement's increased profile within an organization has also meant the barriers that used to exists between procurement and finance are finally coming down and the value of collaboration is becoming apparent.
Procurement technology and know-how powers finance
Successful organizations are already realizing and reaping the benefits of true collaboration between the finance and procurement functions. For example, the increased prominence and capabilities of intelligent procurement technology is providing insight and visibility into the function that was simply not possible a decade ago.
Procurement teams are now able to provide their colleagues in finance with detailed information about spend and payment terms which can be fed into predictive finance analytics tools to generate a better understanding of the company's working capital and budgeting positions.
A more strategic finance
Procurement technology has also allowed finance teams to refocus their efforts on strategic endeavours. Electronic invoicing platforms for example, have automated a process that previously had been highly labour intensive. By automating the invoicing and accounts payable process, organizations have been able to reassign staff previously tasked with chasing invoices and purchase orders onto more strategic, value add projects.
How can you start collaborating?
Below is a list of suggestions that organization looking leverage the benefits from a closer procurement/finance relationship should look to implement.
Develop a standard cost savings language
There is often confusion between the departments as to what exactly constitutes a cost saving. This misunderstanding generally stems from finance departments viewing costs savings as items that reduce expenses from the previous year's income statement.
Procurement teams will often view cost savings more holistically. Often initiatives that don't hit the income statement will be considered a cost saving by the procurement department. Cost avoidance is a good example of this.
If procurement savings definitions are not clearly understood and agreed on by the finance department, some doubt can begin to creep in around the reliability of the figures procurement reports. Developing a joint savings language and a shared understanding of how savings will be reported will go a long way to creating harmony between the two functions.
Help finance with budgeting
It is the job of a procurement function to understand the price of the commodities an organization needs to purchase, both now and into the future. It is unlikely that the finance team will have the same level of insight into the future direction of commodity prices or the difficulties that may arise in securing supply that a buyer does.
By establishing open communication lines between the procurement function and the finance teams and sharing this vital market information allows organizations to be far more effective in producing budgets and savings targets that are accurate and achievable.
Work together on working capital
As revenues and sales dry up, finance teams inevitably turn to working capital as a means to conserving a firm's cash position. Perhaps the most effective way to improve an organization's working capital position is to extend payment terms with suppliers.
In recent years, payment terms at some large organizations have stretched to as long 120 days. While this may be an effective method of improving an organization's cash position, the move is not without criticisms and repercussions.
Moving payment terms, inadvertently weakens an organization's relationships with it suppliers and can even force suppliers to shut down due to cash flow issues.
Furthermore, most suppliers have wizened up to these tactics are simply 'building-in' the increased costs of longer payment to their original pricing. Meaning in reality, firms are not seeing any real benefit from extending payment terms.
Without a close working relationship between finance and procurement, these movements within the company's supply base could go unnoticed. However, if the two functions work together, a more balanced, effective working capital strategy can be formed.
Jointly manage inventory
Generally speaking, CFO's want the lowest inventory levels possible. Low inventory levels mean that cash is being used effectively and money has not been spent on items that lie unused in warehouses. However, there is a balance to be struck between low inventory levels and the risk of running out of stock. It's procurement's job to tell the other side of the 'low inventory' story.
Companies than run extremely low inventory levels may see an upside in their cash position. At the same time, they are exposed to huge risks if they experience a period of unpredicted high demand or if there is a shock in the supply chain.
If procurement and finance teams work together, the correct inventory level, one that will maximize working capital and mitigate against supply and demand risks, will become apparent.
Let us know how your procurement organization works with finance in the comments section below.