How to Start Building the Bridge between Finance and Procurement

Spend Matters welcomes a guest post from Ana Gomez of GEP.

Today’s challenge in all companies is how to maximize profits and reduce current costs. Procurement is an area that can step into the spotlight and help increase the profitability of the company by driving down costs of the contracted products and services. However, there is often limited clarity of the benefits in the profits saved by procurement. Those in finance want to see where the money is and procurement fails to demonstrate how the savings they affirmed correspond to P&L benefits.

The gap of communication between finance and procurement is a challenge in every company. Finance is always requesting that procurement provide clarity of the savings and cutting cost achievements. For that reason, procurement professionals need to work more closely and involve finance in the initial stages of the sourcing projects and make alliances between them to ensure the benefits in the P&L of the savings obtained from the procurement initiatives and efforts.

Procurement commonly used the historical prices, and do not work with the budget stakeholders to define the budget basis and share all the volume and pricing assumptions. On the other hand, finance typically does not involve procurement when defining the budget. In addition, budget holders resist considering procurement savings in their annual business plans because if procurement does not achieve projected targets, their projects and expenses for that year are at risk. Yet another factor causing the unclear savings achievement is the reluctance on the part of the stakeholders to make the adjustments in their budgets and use these savings to buy bigger volumes or scopes, leaving finance out of the strategic decision of what to do with the savings achieved.

One of the priorities of the procurement area is to start involving the finance department, especially when the sourcing projects starts. Early involvement with finance can help build the credibility of any savings estimated and achieved at the end of the project. A good relationship between these two areas can help procurement gain access to information regarding estimated volumes, prices and planning projects where procurement can contribute and be involved at the beginning. Finance sets goals in expenses and may not consider that there are prices for some commodities that are fluctuating. If both areas collaborate, they can set goals that are more realistic for the company. In addition, finance and procurement can work together as a team to ensure and track the realized savings and the benefits to the P&L. An alliance between procurement and finance helps make the company aware of procurements efforts and their contribution to the company objectives.

Procurement has to be seen in the company as a strategic position that contributes in maximizing profits and reducing the costs. However, in order to achieve full visibility and credibility of procurements efforts, procurement leaders need to work very closely to finance areas, align the budgets and have a clear track of realized savings in the financial statement. Finance can share the accountability and sponsorship of the sourcing and procurement projects if their involvement in them is upfront.

For more interesting thinking on procurement, visit the GEP Knowledge Bank.

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First Voice

  1. bitter and twisted:

    This is a counsel of despair, for when the finance tail is wagging the dogm

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