Financial management in procurement and supply

What is financial management in procurement and supply?

Financial management in procurement and supply can be defined as the planning, directing, organising and controlling of the financial activities of an organisation.

The aim of financial management is to maximise value, whilst minimising costs and reducing risks. Having sound financial management skills and processes in place helps to minimise cash outflows. It helps to avoid the unfunded changes to a project and helps to ensure all critical tasks are performed on time.

How procurement can apply financial analysis

Financial analysis skills are crucial to people working in procurement roles, when managing risk, assessing suppliers' financial statements, to make informed decisions and support negotiations.

There are a number of costing techniques that you can do to minimise costs and reduce risks throughout your supply chain.

Whole life costing: This brings increased awareness of total costs. It'll help you assess the total cost of an asset throughout its life span, including costs for repair, upgrade and disposal. This method gives you an accurate forecast of the fulfil cost of a purchase over a given period.

Activity based costing: This method is based on Pareto Analysis. It is used to breakdown an organisation's total external spend, based on value so resources are used to manage the expenditures and prioritised. It also helps to provide insights about future decisions and investments. It's about classifying inventory items, based on their value to the organisation's objectives.

Cost to serve: This technique provides the intelligence needed to improve pricing and logistics strategies and brings any hidden costs to light.

How do you use financial analysis to monitor and evaluate the performance of suppliers over time?

Financial analysis gives organisations a better understanding of how their suppliers are performing. The four statements that are studied are the balance sheet, income statement, cash flow statement and annual report. Procurement can then use these to evaluate their suppliers and make informed decisions regarding their suppliers.

You can also use supplier scorecards which can be used objectively to assess the performance against a list of criteria, such as quality of goods, payments terms and transactions to date. You can also look at the average payment terms and the time it takes for invoices to be paid. You can often improve your working capital by making improvements in supplier payment terms.

A traditional method is spend under management. This looks at the total amount of spend that’s managed by the procurement department. The procurement team will then get visibility over the organisation’s overall spend too.

Listen on demand and get the latest practical insights from our panel of procurement and supply experts.