Ways to Close the Procurement-Finance Gap

Procurement and finance, two hostile functions, must work together to produce value for the organisation. The typical scoreboard connection generates misdirected tensions and lost opportunities based on distrust, ineffective communication, and a lack of knowledge of the distribution chain and financial facts.?

Once upon a time, the connection between procurement & finance was founded on distrust and control. The findings of Protiviti's 2017 Procurement Study are evident: procurement operations must focus on how they produce value and measure and communicate success.

The procurement system strategy wasn't always held in high regard, and finance frequently policed the purchase process, seeking instances of bribery and financial mismanagement. Unfortunately, they occasionally discovered it, extending the cat & mouse play. Finance is typically addressed in the organisational hierarchy, resulting in the functional distance, administrative subordination, and a corporate inferiority complex.

Problems Faced by Procurement System Workers?

• Possessing a shared understanding of the savings realised via a procurement solution. Procurement savings are frequently not in line with accounting norms.
• Project-specific tracking of procurement savings and their influence on enterprise-level savings.
• Creating a procurement and financial reporting and monitoring system.
• Balancing operational continuity aims of the Chief Procurement Officer with inventory working flow approaches of a Financial Controller.
• Setting a similar aim with suppliers on credit conditions.

As per the Riskmethods baseline research, 79% of organisations stated that supply chain disruptions harmed their business, causing them to lose 4% or more of their overall sales in the previous three years.

Three Steps to Collaboration and the Role of Technology in Procurement System?

You can handle the difficulties mentioned above technologically as well as via the use of novel procedures. The three stages to overcoming the problems discussed above and bridging the procurement-finance gap are as follows:

1. Create baseline expenditure information and a shared definition of savings between procurement and finance.
2. Track and manage enterprise savings by category, trade unit, and impact type.
3. Show the effect of stated reductions on the bottom line.

Technology offers a platform for procurement and finance to agree on a uniform savings concept and establish agreed-upon benchmarks to avoid future disagreements. Once the baseline budget has been decided upon, the next critical step would be to monitor the savings realized across categories and business segments across the firm. It's also essential to classify the savings based on their influence on the company's bottom line.?

Thus, savings in, for example, the cost of goods sold might influence both the profit and loss and the balance statement. On the other hand, savings created through process optimization will only affect the P&L (Selling and General Administrative expenditure) but not the financial statements.

Tracking and controlling savings throughout this fashion increases accountability and transparency among procurement and financial experts and allows procurement to estimate and report reductions in finance-speak. Both finance and procurement must have access to a platform that allows them to establish a single agreed-upon concept of savings & base spending that can be utilised to judge procurement success. Technology allows e-procurement to illustrate the influence of its savings just on the bottom line of the organisation, and finance may use this information collected from procurement software to track their progress and anticipate and record savings into departmental budgets and income statements.

According to a Foley poll of 150 senior manufacturing managers, 61% of organisations don't multi-source their items. This is a danger since relying on a single source or distributor might lead to a disruption in the case of a natural calamity or geopolitical incident.

Restructure the Procurement System by Including Finance

Finance seems to have the ability to contribute far more to procurement performance than it generally does. You have seen successful firms handle finance as an important member of the procurement management team in your work with several companies.

Below-mentioned are the elements that support a solid link between finance and procurement:

1. Procurement Method

• Examine important spending techniques such as commercial, order fulfillment, and technological specifications.
• Complete and align efforts, either within or across divisions.

1. Market Intelligence & Compliance

• Ensure regulatory framework compliance, covering taxation and other local regulations, and provide insight into supplier management initiatives.
• Analyse political and economic developments and comprehend the consequences of procurement solution strategy.

1. Budgeting & Interdependence

• Determine the procurement system expenditure with productivity-based objectives for activities, net income goals, and worldwide spending decrease in specific areas determined by company leadership.
• Maintain a comprehensive initiative flow to accomplish goals.

1. According to recent research, real ICC may vary between 18% to 75% of the overall market price of the goods. The optimal inventory holding cost is between 15 and 25% of the entire inventory value.
2. Methodology & Confirmation of Savings
3. Describe the evaluation of savings-related indicators such as cost savings & cost avoiding and non-savings-related measures such as cash advantages, supplier risk control, and supplier performance.
4. Reconcile expenditures with the statement of profit and loss, taking volume & foreign currency rate into account.
5. Benefits must be approved.

Supply management solutions, which automate the Source-to-Settle process, lie at the crossroads of many procurement systems and AP operations and provide an excellent foundation for bridging the gap and unifying the two teams' procedures, objectives, and efforts.

Procol is a procurement software that can ease a business’ purchase process with automation. It is both agile and responsive, making it easy to use. Schedule a demo to understand its flexibility for your business and procurement needs.