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Traditionally, different departments within an organization are structured around their own unique functions, objectives, and operations. Despite their heavily intertwined relationships, this is often the case for the procurement and finance departments.
Is procurement part of finance? While procurement and finance functions differ at their core, their processes intersect at many points. In most organizations, the two are separate departments. However, procurement and finance teams must work together to achieve the best performance and business outcomes.
The Differences Between Finance and Procurement
The finance and procurement department teams need to work well together, and it’s equally important for there to be a clear understanding of each team’s responsibility.
The procurement team aims to save money for the business, and the finance team sets procurement spending limits. Finance is responsible for paying for whatever the procurement team orders and receives. In turn, the procurement team needs to ensure that the items they ordered are those they received and that what they received is what the finance team paid for.
Finance provides spend management reports, revenue reports, and other information about the business’s overall financial health. Procurement should embrace these financial management resources to support its daily operations and decision-making.
With so many different players involved, so many different processes concurrently at work, and a wealth of important data being created, shared, and managed, it’s no surprise that the collaboration between procurement and finance can get complex.
Understanding Why Procurement and Finance Must Work Well Together
In some ways, the finance supply chain is the heartbeat of any business. Without it, businesses wouldn’t have enough cash flow to keep running. What’s at the heart of this critical operation, you might ask? Procurement and finance.
When the financial supply chain works well, businesses have enough cash to pay for everything from supplies to office space to employee salaries. This chain relies on ideal spending operations, proper supplier relationship management, and valid procurement choices.
This means that finance and procurement must work together in the financial supply chain to ensure that businesses thrive. So, how can businesses make that happen? Let’s explore.
Unify finance and procurement visibility with procurement automation
Use best practices in your procurement process through automation software technology to increase efficiency and add controls for finance and procurement.
The Relationship Between Purchasing and Finance Departments
How do purchasing procurement and finance work together? Procurement and finance teams work in a supportive manner to plan budgets, create forecasts, and conduct financial reporting and analysis. Finance is responsible for setting the budgets and creating spending and revenue reports, and procurement is responsible for sticking to those budgets and making sure the items purchased have been received and paid for by finance. The two should align on KPIs to make the most of their collaboration.
There are various ways businesses can align procurement and finance and enable them to collaborate actively and efficiently. One important aspect of this transition involves a transformation in understanding—for example, supporting both sides in understanding each other’s priorities and KPIs. Another involves introducing technologies and practices that automate and integrate the teams’ processes.
Here are specific areas to focus on:
Align on KPIs
The finance and procurement teams should understand each other’s goals and their reasoning. This isn’t important only for the finance team’s sake. Indeed, procurement team members should be able to identify and understand the return on investment of their choices and actions. This helps procurement adopt some of the values that drive finance’s decisions. The procurement team can then demonstrate the positive impact they’ve achieved—for example, through cost reductions or cost avoidance—which supports finance’s KPIs and metrics.
An excellent way to communicate goals is to hold a joint meeting for employees, with presentations from the Chief Financial Officer (CFO) and the Chief Procurement Officer (CPO).
Clarify who’s responsible for what
Smooth collaboration between any two teams requires that both sides understand who’s responsible for what. For the most efficient collaboration, procurement and finance team members must be aligned on who is responsible for each key activity.
Be aware of and empathetic to the other side’s position
Procurement and finance are both involved in spending—and spend management is a complex subject that each team approaches from different angles. Finance often views spend management through the accounts payable lens, focusing on budget, recordkeeping, and invoice processing. Meanwhile, procurement focuses more on complying with the approved supplier list, negotiating the best contracts, and maintaining supplier relationships.
For the most effective collaboration, the procurement and finance teams should understand how the other views spend-related issues. This will enable them to keep their goals and activities aligned. For example, an understanding of finance management’s point of view will enable procurement to work toward contracts and deals with suppliers that provide the best cost values (including flexible payment terms). In turn, finance can support procurement’s understanding of the value of efficient supplier onboarding that eliminates payment delays and reduces the risk of fraud.
Jointly address risk management
Finance and procurement share the need to mitigate the risks of procure-to-pay because purchasing goods is subject to fraud and errors. Your business needs a system to help procurement and finance achieve risk management responsibilities. The system can establish an audit trail, validate suppliers, manage digital PRs and POs and contract documents for invoice matching, and reduce the chance of other procurement-related business risks.
Get aligned about cost savings reporting
Interestingly, procurement and finance don’t hear the term “cost savings” the same way. For procurement, this term generally speaks to a decrease in price. For finance, it relates to lower expenses than last year’s statement. In light of these differences, the procurement and finance teams should align on standards and terminology regarding cost savings reporting to support the best collaboration.
Set finance goals together
The procurement team must be involved in setting finance goals to ensure they are informed and realistic. Otherwise, finance may be blind to procurement’s knowledge about things that impact their goal-making. For example, finance may have no idea how widely prices for certain things fluctuate, which can lead to them imposing unrealistic limitations on procurement’s spending.
Talk about payment considerations
The finance and procurement teams’ perspectives and values surrounding payments don’t always align, and each team needs to be aware of this. As they relate to supplier payment terms specifically, these differences can strain supplier relationship management and even lead to suppliers refusing to work with the business, complicating matters for procurement.
Finance might push for payment terms that work better for them, like 90-day payments that make it easier to manage cash flow. But these terms might not be suitable (or acceptable) to suppliers who have their own cash-flow considerations. Meanwhile, these terms also make it more difficult for procurement to maintain positive supplier relationships. Indeed, suppliers might even raise their prices to compensate for unattractive payment terms.
The ideal collaboration between procurement and finance—the kind that will attract suppliers’ interest in working with the business—addresses payment issues and aligns the two teams’ approaches with each other and stakeholders.
Embrace enabling technologies
The collaboration between finance and procurement can become much smoother and more efficient when the teams have technologies and practices that streamline and automate flows and centralize data in a modern purchasing process.
Technology can enable procurement and finance to improve contract compliance, spend control, and risk reduction. Another advantage of automated procurement activities and finance operations is that they enable C-level employees to take an active role in processes as they happen easily—a type of collaboration that minimizes errors and delays.
Procurement and finance technologies also provide a crucial layer of visibility into anything from the status of specific approval workflows to real-time budgets and beyond. This enables finance to easily ensure they’ve received every possible discount and secure early discounts with early or on-time payments. Discounts improve cash flow management and increase working capital and profitability. At the same time, when backed by technology, the procurement team can easily identify which suppliers are preferred for any service or good they need and avoid partnering with those who don’t offer the best price or value.
A siloed approach to procurement and finance operations—in which teams work side-by-side and not in an integrated fashion—seriously hinders efficient operations. Indeed, successful collaboration between finance and procurement can mean the difference between a business that survives and one that doesn’t. Businesses can achieve better results while making their employees’ lives easier by ensuring that both sides understand each other’s values and drives and embracing modern technologies to automate and integrate their operations intelligently.
FAQs
What is procurement?
Procurement is an organization’s process for obtaining goods and services needed to sustain or improve its operations. It includes sourcing vendors or suppliers to provide these goods and services, managing these supplier relationships, and the confirmation and record keeping used by AP teams.
What is the purpose of procurement?
Procurement processes help organizations negotiate and acquire the external resources they need organizationally and transparently. This helps teams conduct these purchases on a large scale, better understand their spending practices, and see where they can make money-saving changes.
Conclusion
Finance and procurement have common goals and important roles in:
- Purchasing goods and services with purchase orders based on approved purchase requisitions
- Managing supplier data, supplier performance, and supplier relationships
- Matching invoices with purchase orders and receiving data in accounts payable
- Verifying invoices for accuracy
- Accurately accounting for purchased items
- Getting invoice payment approvals
- Making global supplier payments
- Achieving spend control
To help procurement and finance collaborate, Tipalti provides unified procurement and AP automation software integrated with your ERP or accounting software. Tipalti Procurement automation software automatically creates POs from approved PRs, improves spend visibility, and helps your business efficiently achieve shared goals to reduce costs, improve business performance, and create excellent supplier relationships.
To gain a key resource for purchase requisition intake and purchase order automation that unites procurement and finance teams, learn more about Tipalti Procurement automation software.
