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Strengthening the ties between your business’s procurement and finance teams is a smart way to improve your balance sheet and supplier relationships.
In many companies, the relationship between finance and procurement is a complicated one. While these departments usually operate independently, they also have a lot in common — especially when it comes to spending. This disconnect can fuel tensions, often rooted in a belief that procurement should fall under finance’s authority.
But your finance and procurement teams don’t have to play out this dynamic. In fact, finance and procurement are better together, with the potential to drive more efficient processes, stronger supply chains and a healthier cash flow in close coordination. A Harvard Business Review Analytic Services study found that transparency between finance and procurement is closely linked to business success.
Whether you’re a procurement or finance professional, there are several ways to enable teamwork between the two departments.
Finance and procurement have a greater positive impact on the business together than they could ever have separately. According to Accenture, unifying procurement, finance and supply chain activities can provide a 15% to 20% savings on direct and indirect spend, and a 3% to 5% lower cost of goods sold (COGS). When both teams clearly understand each other’s goals and can easily access mutual data, your business can:
For example, procurement teams often negotiate vendor rebate contracts. Including finance in the negotiation process can help your business maximize rebate benefits, improving cash flow. Or, if your strategic suppliers have unfavorable payment terms, procurement can press finance to find solutions that make the supplier relationship more financially viable.
There are many reasons why your finance and procurement teams may be disconnected. Team members are most likely busy with their own priorities and tasks. It could also stem from a lack of the tools needed to prevent data silos and facilitate communication.
Whatever the reason, there are several tactics for getting procurement and finance on the same page, essentially boiling down to better communication and understanding. Remember that this process won’t happen overnight. It requires time, resources and buy-in from both sides.
Start by clarifying the roles and responsibilities of each department, especially where there’s functional overlap. This will help both teams avoid friction, oversight and duplicate efforts. Take the time to educate finance and procurement on each other’s goals, workflows and verbiage, with an emphasis on how each team approaches spend. For example, in procurement, the term “cost savings” translates to lowering goods and services costs. In finance, it usually means lowering expenditure on annual financial statements, which isn’t always directly tied to procurement.
It’s also helpful to outline the advantages of coordination to achieve buy-in from stakeholders on each team. Procurement may benefit from gaining more financial knowledge and by promoting how its work has a positive impact on the business — something finance professionals could be unaware of.
Establish a regular meeting cadence between procurement and finance alongside ongoing communication channels. If you have in-person offices, move the two departments physically closer. For remote workforces, create dedicated channels on tools such as Slack.
You can also ask members from the other department to work together on various tasks, such as supplier negotiation sessions. Start small here, connecting with one or two stakeholders who show interest in learning more about your operations. Consider inviting individuals with influence on the other team — those who can advocate for a partnership.
It’s crucial that finance and procurement set shared goals and key performance indicators, which will ensure that you’re both measuring the same thing in the same way. This is important when it comes to cost savings, making it easier for procurement to demonstrate the return on investment of their decisions to finance, and vice versa. Collaborative goal-setting also reduces blind spots when finance is setting procurement budgets. For example, finance may be unaware of price fluctuations and other factors that may otherwise make a budget unrealistic.
Finance and procurement departments are often misaligned due to outdated tools and processes — such as storing most information in hard-to-access spreadsheets. Instead, invest in shared technologies, such as client databases, project management tools and procure-to-pay systems where everyone can reference the same information. The act of choosing and rolling out new tools is in itself a good opportunity to initiate collaboration.
Every business will have different software needs. However, automation and artificial intelligence can make financial reporting faster and more accurate. It also keeps procurement on track with budgets and supplier contracts. Remember to prioritize solutions that are user-friendly for both finance and procurement personnel.
Considering the rising cost of capital, your finance team may be pushing for longer payment terms with suppliers. This benefits your balance sheet by increasing cash flow. However, it can also sour supplier relationships, since these businesses also need sufficient cash flow to operate. Suppliers may raise prices to offset such agreements or even end the relationship if lengthy terms aren’t sustainable.
An effective procurement-finance partnership will instead work to strengthen supplier relationships while addressing your business’s cash flow needs. This may necessitate implementing solutions such as supply chain finance or early payment programs. For instance, programs such as C2FO’s Early Pay solution can support your suppliers’ cash flow while improving core financial metrics such as EBITDA.
Lingering supply chain disruptions and economic uncertainty necessitate an end to the cliché of contentious procurement-finance relations. Businesses simply have too much to gain from uniting these functions, most notably improved cost savings and cash flow.
Coordinating procurement and finance is a cultural shift that takes time. However, fintech solutions such as early payment programs can deliver quick wins, helping procurement strengthen supplier relations while satisfying finance’s balance sheet.
Discover how C2FO’s solutions can help procurement and finance teams reach their goals together.
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