Guest post: Taking a Financial Approach to Procurement

Lucy Mitchell   |   November 30, 2019

Procurement is undeniably one of the most crucial aspects of any business - regardless of any business factor, whether it is business type, customer base, financial model or otherwise, procurement is a significant part of what enables a business to provide value to consumers. 

More specifically, every aspect within the procurement process will have a direct impact on the extent to which a business can operate competitively and add value to the goods and services they are being supplied. This is true whether it depends on the terms by which buying decisions are made, the way in which goods and services are acquired, and (importantly) the financial approach that is taken in making procurement decisions. 

The Importance of Procurement in Cost Structure

Cost structure - the expenses that a business incurs, and how these costs are spread across business areas and functions - is important in a number of ways. When focusing on procurement, it is clear that how a business spends its money is crucial in creating value and making a profit. 

The appropriate financial management within procurement will minimise costs, reduce risks, and benefit all stakeholders within the value chain. Achieving this will indirectly affect every other part of a business, as supply of goods and services is maximised in quality and overall value, and savings in costs can be redirected to other cost centers within a business. 

More broadly, there are various examples that show the business impacts of how money is used. Even the way in which it is invested on a personal level is crucial in achieving effective financial outcomes - an example of this is in regard to Bitcoin prices, as seen on Independent Reserve. As an investment asset that is rapidly increasing in popularity, Bitcoin provides a clear demonstration of how investment and fund allocation can be profitable. 

Having a Strong Relationship Between Finance and Procurement Departments

Whilst it is clear that finance plays an important role within the procurement process, a crucial way in which the appropriate financial procurement decisions are made is in regard to the relationship between finance and procurement departments of a business. 

Firstly, effective operation between these two business functions will require the alignment of goals, objectives and overall business vision, which can allow for a business to gain a competitive advantage and general optimisation of procurement. Following this, more specific processes can be defined between the two areas. 

For example, the financial department of a business will implement spending budgets, which will then be utilised as effectively as possible in procurement. In automating procurement processes such as invoice processing, risk can be further mitigated and efficiency is maximised. Financial departments will also ensure effective procurement processes in the creation of financial and management reports, giving an indication of overall company performance and the contribution that procurement is making towards this performance. As a result, procurement will use these reports, alongside budgetary requirements in altering business processes and planning for the future. 

Ensuring Effective Implementation with a Focus on Objectives and Culture

Evidently, a clear and close relationship between finance and procurement is crucial in successful business operation - more specifically, the business objectives, outcomes and attitudes implemented should be consistent across these functions as well as the overall business. 

One area in which this is important is when it comes to task parameters and delegation of responsibility. Whether this means the assignment of key activities between departments and (more specifically) employees, or outlines of what each department is set out to do as a whole, clearly defined responsibility through planning and appropriate negotiation where necessary will ensure that collaboration is efficient and effective, with no overlap or confusion. 

Next, it is important that the staff within each department have a clear understanding of what the jobs of the other departments entail, in both a day to day context, as well as a broader context. This understanding will ensure that finance can set appropriate limits, budgets and goals, based on factors such as supply pricing, the processes involved in supply chain management in general, and so on. The same applies vice versa, which will ensure that procurement can understand financial decisions of the business. Often, an effective approach to this is through documentation and structured, formal project onboarding processes.

Ultimately, financial management is a key part of procurement in general, however the importance and influence it holds over a business as a whole is often understated. In putting a greater emphasis on the relationship between finance and procurement, businesses are often able to take a ground up approach that will positively impact broader KPIs and growth. 

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This is a guest blog post for Felix. All views expressed in this article are those of the author only. 

Lucy Mitchell
Lucy is the content manager at Current.com.au. From Sydney, Australia, Lucy specialises in tech and finance writing. She loves staying up to date with industry news so she can bring well researched, timely and accurate information to her readers.

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