How Procurement & Finance Can Collaborate
PurchTips - Edition # 214 October 5, 2010
By Charles Dominick, SPSM
Do You Collaborate With Finance In These 4 Ways?
- Agreeing on Cost Savings Reporting Standards. When procurement departments use the term "cost savings," they are often referring to price reductions. When CFO's hear the term "cost savings," they often expect to see a reduction of expenses from the previous year's income statement to the current year's. Not every price reduction is reflected on the income statement like that and, as a result, some CFO's doubt Procurement's cost savings claims. By agreeing with Finance on standards and using the income statement to "keep score," Procurement's cost savings reporting will be more believable.
- Considering The Downsides of Certain Cash Flow Strategies. As credit became harder to get in recent years, organizations sought ways to hold onto cash longer. One way was for CFO's to insist on extending supplier payment terms to 90 or more days. That improves cash flow, but Procurement sees consequences that Finance may not: supplier relationships being strained, suppliers raising prices to compensate for slower cash receipt, or even having fewer suppliers willing to do business with the organization. By collaborating, Procurement and Finance can construct a more balanced cash strategy.
- Determining a Balanced Inventory Approach. One line on a balance sheet that CFO's watch to evaluate performance is inventory. CFO's generally don't like high inventory. They feel that using cash to procure items that sit idly on the shelf is wasting the opportunity to invest that cash in activities that will provide a return on investment. However, Procurement knows the operational realities of inventory: many organizations need it to make sales and continue operating through unexpected events like a spike in demand or an interruption in supply. Again, Procurement-Finance collaboration can help by identifying the inventory needed to balance operational continuity and working capital strategies.
- Considering Supply Market Forces When Setting Financial Goals. Finance sets expense goals. If these expenses involve commodity purchases, Finance may not have the same awareness that Procurement does with regard to how commodity prices fluctuate. By Procurement and Finance collaborating, the organization can avoid setting unrealistic financial goals that will harm them later.
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