Improving the finance-procurement collaboration

In most organisations, finance and procurement are separate departments, working alongside each other rather than directly with each other. While this is fairly standard procedure, it is not the best option as far as efficiency is concerned.

While their functions may differ, their processes intersect. In fact, treating them as entirely separate can negatively affect the organisation. Aligning them closer and getting them to work better together can have significant benefits.

Here we take a closer look at the roles of procurement and finance, why they often struggle to collaborate effectively, and the benefits of working more closely for both departments and the business as a whole.

Table of contents

• Key differences between finance and procurement departments
• Why collaboration between finance and procurement is essential
• Barriers to effective finance-procurement collaboration
• How finance and procurement can work better together
• Conclusion

Key differences between finance and procurement departments

The roles of the finance and procurement departments differ in some important ways. Both have different responsibilities, and it’s essential to be clear on these:

Role of finance

Finance focuses on making sure the balance sheet is in the black. Its tasks involve providing revenue reports, spending management reports, and everything to do with the organisation’s financial health.

Role of procurement

Procurement focuses on obtaining goods and services to improve operations. It sources suppliers and vendors to supply goods, manages supplier relationships, and carries out record keeping.

Every organisation needs resources, and procurement helps to negotiate and acquire them.

Crossover between finance and procurement

Despite their different roles, there is a lot of crossover between finance and procurement. While procurement is about spending money, finance sets the spending limits – finance pays for what procurement orders, and procurement must ensure that it receives whatever it spends the money on.

Procurement can also use spend management reports and other reports produced by finance to assist with its decision-making processes.

Why collaboration between finance and procurement is essential

Both finance and procurement work best when they work together and align their goals. However, they often don’t have the tools or knowledge to collaborate effectively and seamlessly. Often, they’re simply not aware of the importance of close collaboration.

Competitive advantage

One of the main aims of procurement teams is to save money for the organisation wherever possible, not only in terms of cost savings but also by avoiding unnecessary spending.

Procurement, therefore, should be seen as an important partner for finance in helping it meet the financial goals of the business. When the two departments work as partners, the organisation gets a competitive advantage, boosting overall business performance.

Financial supply chain

Finance and procurement must work together to ensure the financial supply chain works well so the organisation can thrive.

The finance department is essential to ensure enough cash flow. When the financial supply chain is working effectively, organisations have enough cash to pay for what they need including supplies and salaries.

But this also relies on supplier relationship management and procurement choices, meaning close collaboration is essential.

Business strategy

Finance departments used to be a back-office function, but they are now becoming more of a strategic partner. CFOs now develop a detailed understanding of the business that goes beyond bookkeeping.

The same needs to be true of the procurement department. Procurement becoming more of a strategic partner can only benefit the business.

Barriers to effective finance-procurement collaboration

While collaboration is important between finance and procurement, it can often be complex. There’s lots of data being created and managed, often many people involved, and different processes are going on at the same time.

Despite the importance of better collaboration, there are certain barriers that often get in the way.

Communication

One of the most basic issues that prevent effective collaboration is insufficient communication between purchasing and finance departments.

When departments stick to themselves and don’t talk with other departments, they cannot collaborate properly for the organisation’s benefit.

Trust

Finance employees may doubt how effective the procurement department is, and vice versa, which can lead to trust issues that hinder effective collaboration, and ultimately, the growth of the company.

Fear of change

In many organisations, the people working there still remain stuck in the traditional mindset.

Because finance and procurement have been separate for so long, there may be people in the organisation who don’t want to change the way things have always been done.

How finance and procurement can work better together

There are several ways that finance and procurement departments can collaborate more effectively for the good of the business.

Clarify roles and responsibilities

Both departments should be clear on who is responsible for what. When there is a better understanding of responsibilities, it’s easier to avoid confusion and ensure a smooth collaboration.

Finance and procurement are both involved in spending, but they approach spend management differently. Finance through accounts payable, budgets, and invoicing while procurement through complying with supplier lists, supplier relationships, and negotiating contracts.

Understanding how each team views these issues allows for a better alignment of finance and procurement activities. If procurement understands finance’s view, they can focus on deals and contracts that have better cost values.

Align KPIs

Both departments need to align their KPIs for a better understanding of the different goals that each department has.

For example, it should be important for procurement to demonstrate the impact of their decisions in terms of cost reductions, which are in support of the finance team’s own KPIs.

Discuss payment considerations

Finance may want certain payment terms that work best for them, like 90-day payments, to manage cash flow more efficiently. However, these payment terms may not work for the procurement department as suppliers often have their own terms in place, and they’re unable to meet the terms set out by the finance department.

This can result in procurement being unable to build positive relationships and maintain them with the suppliers. Not only can this lead to higher prices from suppliers, but it can even lead to the risk of suppliers not wanting to work with the organisation at all.

To resolve this problem, finance must discuss payment terms with procurement rather than submitting them directly. Procurement must be able to articulate the consequences a payment term can lead to, so they can work out a solution that is suitable for both finance and suppliers.

Understand inventory issues

The finance department often sees the inventory line as indicating performance. But it often lacks the visibility to understand nuances the same way procurement does. 

For example, finance may automatically think that stock that sits on the shelf for weeks or months is a waste of money, while procurement may have assigned those products as safety stock.

Agree on what cost savings mean

Finance and procurement teams often have difficulty aligning on what they mean by cost savings when it comes to reporting. For procurement, cost savings means price reductions; for finance, it usually means lowering expenses from one year to the next.

For example, cost avoidance achieved by restricting cost increases and contracting “value-added” services from suppliers is considered a significant means to save costs by procurement, but finance may not accept these.

Determine financial goals together

It should be important for both departments to set financial goals together to make them more realistic.

The procurement team should be involved in setting financial goals – this way finance gains important insight into price fluctuations and other factors that are crucial for creating a realistic roadmap and keeping expectations regarding costs anchored in reality.

Make better use of technologies

Better collaboration becomes much easier with the right technologies. When the teams are equipped with the right technology, this can lead to benefits like reducing risk and providing greater visibility to approval flows and budgets.

Procurement can use technology to manage vendor relationships and identify the preferred suppliers for particular goods and services. Technology can help the procurement department get the information they need sooner, so they can spend more time on other areas.

Conclusion

For seamless collaboration, both teams need to work together in an integrated fashion. Both sides should be on the same team, understanding their values, goals, priorities, and KPIs, which will help make operations more efficient. While their roles are different, efficient teamwork between finance and procurement is essential not only for the individual success of the teams but also for the business as a whole.