Chief procurement officers (CPOs) are always looking for new ways to increase internal advocacy and improve strategic value to elevate the role of procurement. As the lead of an organization’s financial vision, CFOs can support their counterparts in procurement by helping them achieve this goal. For CFOs looking to build up that relationship, start the conversation by focusing on building a strategic procurement plan aligned with finance’s working capital strategy.
Regardless of a company’s size or industry, working capital is an important metric in assessing the long-term financial health of the business and its ability to meet short-term cash obligations. While the CFO is ultimately responsible for overseeing the organization’s working capital strategy, many departments play important roles in executing that strategy. For CFOs who need support in navigating supply chain and liquidity risks, as well as other business continuity issues, procurement is uniquely positioned to be a company’s eyes and ears.
Here are some insights about how CFOs can take an active role in aligning strategic procurement to a company’s overall working capital plans.
The obvious path to impacting working capital is via spend management. Here are some examples of how organizations can realize working capital improvements through spend management:
- Cost reduction. Through strategic sourcing, procurement can lower the cost of goods and services purchased, thus creating additional cash on hand for the business.
- Inventory management. By actively coordinating with other departments to monitor and balance inventory levels, procurement can keep the cost of inventory down by proactively adapting purchasing schedules in accordance with current demand.
- Enforcing procurement compliance. Implementing process and policies that increase spend under management allows procurement to reduce maverick spend. When procurement actively enforces compliance, this ensures everyone in the business takes advantage of pre-negotiated rates maximizing cash savings for the business.
All the above-mentioned activities impact the “cash-out” portion of working capital. Achieving savings means less money is spent on goods and services, sound inventory management means the business is not purchasing too much or too soon. The net impact of this is less cash out the door and improved liquidity.
CFOs should work closely CPOs to establish targets for savings and inventory levels that are aligned to the overall business goals. CFOs should also advocate for procurement by visibly enforcing compliance with procurement policy.
Perhaps the most powerful lever for procurement to influence working capital is the ability to negotiate payment terms with suppliers, thus ensuring money is not being paid to suppliers earlier than necessary. CFOs and CPOs often work in tandem utilizing this approach to optimize cash flow.
Dictating when companies must pay their bills is one of the fastest routes to increasing working capital. Favorable payment terms increase cash on hand and enable CFOs and finance departments to more accurately forecast cash flow. CFOs should work with their procurement counterparts to develop a strategy around payment terms. Set payment term targets according to spend categories as standards and realistic expectations can vary depending on supplier industry.
Supplier relationship management
Enforcing compliance and implementing supplier performance management procedures are other great ways procurement can be leveraged to improve working capital. For example, when it comes to supplier scorecards, on-time delivery is a KPI that is almost always tracked. However, more often than not, suppliers are only penalized for late deliveries when in reality it is equally important to track and manage early deliveries. Similarly, procurement should not only be tracking whether requested delivery quantities are met, but also that suppliers are not over-delivering. When goods or services are over-delivered or received before they are needed, this ties up cash and facility space.
The above listed scenario is just one example, but there are many tactics to improving working capital that fall under the supplier relationship management (SRM) umbrella. Therefore, it is important for CFOs to be familiar with procurement’s SRM procedures and systems to ensure suppliers are being managed according to important financial KPIs. CFOs and CPOs should maintain a regular cadence or feedback loop to monitor critical suppliers and continuously manage targets and expectations.
When well planned and executed, strategic procurement can be one of the most effective tools in a CFO’s arsenal to improve working capital. However, it is only possible when finance and procurement are aligned on organizational target outcomes. An open line of communication and a regular cadence during which the CFO shares the business’ financials and discusses how procurement’s priorities, targets and timelines specifically align with corporate financial goals. Also, CFOs need to empower procurement by advocating for the department and reinforcing the need to adhere to policy.