Traditionally, different departments within an organization are structured around their own unique functions, objectives and operations. This is often the case for the procurement and finance departments, despite the fact that the relationship between the two is so heavily intertwined.
Is procurement a part of finance? While at their core, procurement and finance functions differ, their processes intersect at many different points. In most organizations, the two are separate departments. But to achieve the best performance and business outcomes, it’s imperative that procurement and finance teams work together in alignment.
The Differences Between Finance and Procurement
It’s important for the finance and procurement teams to work well together, and it’s equally important for there to be a clear understanding about what each team is responsible for.
The procurement team aims to save money for the business—and it’s the finance team that sets procurement’s spending limits. Finance is also 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 is responsible for providing spend management reports, revenue reports, and other information surrounding the overall financial health of the business. These resources should be embraced by procurement to support their 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 can be viewed as 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 doesn’t only rely on ideal spending operations; it also relies on proper supplier relationship management and valid procurement choices.
With this, for the financial supply chain to ensure that businesses thrive, finance and procurement must work hand-in-hand. So, how can businesses make that happen? Let’s explore.
The Relationship Between Purchasing and Finance Departments
How do purchasing or procurement and finance work together? Procurement and finance teams work in a supportive manner to plan budgets and create forecasts, and conduct financial reporting and analysis. Finance is responsible for setting the budgets and creating spend and revenue reports, and procurement is responsible for sticking to those budgets, as well as 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 actively and efficiently collaborate. 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 the introduction of 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 the reasoning behind them. 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.
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’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 in understanding the value of efficient supplier onboarding that eliminates delays in payments and reduces the risk of fraud.
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 in comparison with 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
For finance goals to be set in a way that’s most informed and realistic, the procurement team must be involved in setting those goals. Otherwise, finance may be blind to the knowledge procurement has about things that impact their goal-making. For example, finance may have no idea about how widely prices for certain things may 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 it’s important for each team to be aware of this. As they relate to supplier payment terms in specific, these differences can strain supplier 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 relationships with suppliers. Indeed, suppliers might even raise their prices to compensate for unattractive payment terms.
The most ideal collaboration between procurement and finance—the kind that will have suppliers wanting to work with the business—addresses payment issues and aligns the two teams on their approach.
Embrace enabling technologies
The collaboration between finance and procurement can become much smoother and more efficient when the teams are equipped with technologies and practices that automate flows and centralize data.
Technology can enable procurement and finance to improve contract compliance and spend control, and also reduce risk. Another advantage of automated procurement and finance operations is that they enable C-level employees to easily take an active role in processes as they happen—a type of collaboration that minimizes errors and delays.
Procurement and finance technologies also give a crucial layer of visibility into anything from the status of specific approval flows, to real-time budgets and beyond. Among other things, this enables finance to easily ensure they’ve received every possible discount, and subsequently secure early discounts with early or on-time payments. 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 are working side-by-side and not in an integrated fashion—is a serious hindrance to efficient operations. Indeed, successful collaboration between finance and procurement can mean the difference between a business that survives, and one that doesn’t. By ensuring that both sides understand each other’s values and drives, and by embracing modern technologies to intelligently automate and integrate their operations, businesses can achieve better results while also making the lives of their employees easier.
What is procurement?
Procurement is the process an organization uses to obtain goods and services needed to sustain or improve their operations. It includes sourcing vendors or suppliers to provide these goods and services, managing these supplier relationships, well as the confirmation and record keeping used by AP teams.
What is the purpose of procurement?
Procurement processes are used to help organizations negotiate and acquire the external resources they need in an organized and transparent way. This helps teams more easily conduct these purchases on a large scale, better understand their spending practices, and see where they can make money-saving changes.