Role of CFOs in aligning strategic purchases with working capital plans
Purchasing Managers (CPOs) are always looking for new ways to increase internal advocacy and improve strategic value to elevate the role of purchasing. As the leader of an organization’s financial vision, CFOs can support their purchasing counterparts by helping them achieve this goal. For CFOs looking to build that relationship, start the conversation by focusing on developing a strategic sourcing plan aligned with finance’s working capital strategy.
Regardless of the size or industry of a business, working capital is an important measure in assessing the long-term financial health of the business and its ability to meet its short-term cash obligations. While the CFO is ultimately responsible for overseeing the organization’s working capital strategy, there are many departments that play an important role in executing that strategy. For CFOs who need help managing supply chain and liquidity risks, as well as other business continuity issues, purchasing is uniquely positioned to be the eyes and ears. from a company.
Here’s some information on how CFOs can take an active role in aligning strategic purchasing with a company’s overall working capital plans.
The obvious way to have an impact on working capital is through expense management. Here are some examples of how organizations can improve their working capital through expense management:
- Cost reduction. Through strategic sourcing, sourcing can reduce the cost of goods and services purchased, thereby creating additional cash flow for the business.
- Inventory management. By actively coordinating with other departments to monitor and balance inventory levels, sourcing can reduce the cost of inventory by proactively adjusting purchasing schedules based on current demand.
- Enforce compliance with purchases. Implementing processes and policies that increase spending under management enables procurement to reduce unconventional spending. When procurement actively enforces compliance, it ensures that everyone in the business benefits from pre-negotiated rates that maximize cash savings for the business.
All the aforementioned activities impact the “cash-out” part of the working capital. Saving money means less money is spent on goods and services, good inventory management means the business is not buying too much or too soon. The net impact of this is less money at the door and better liquidity.
CFOs should work closely with purchasing managers to establish savings and inventory levels goals aligned with overall business goals. CFOs should also advocate for procurement by visibly enforcing compliance with the procurement policy.
Perhaps the most powerful sourcing lever for influencing working capital is the ability to negotiate payment terms with vendors, ensuring that money is not released to vendors sooner than is necessary. CFOs and CPOs often work in tandem using this approach to optimize cash flow.
Figuring out when businesses need to pay their bills is one of the fastest ways to increase working capital. Favorable payment terms increase available cash flow and allow CFOs and finance departments to more accurately forecast cash flow. CFOs should work with their purchasing counterparts to develop a payment terms strategy. Set payment deadline goals based on expense categories, as realistic standards and expectations may vary by vendor industry.
Supplier relationship management
Enforcing compliance and implementing vendor performance management procedures are other great ways to leverage purchasing to improve working capital. For example, when it comes to vendor dashboards, 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 just as important to track and manage early deliveries. Likewise, procurement should not only check whether the requested delivery quantities are being met, but also that the suppliers are not over-delivering. When too many goods or services are delivered or received before they are needed, it monopolizes money and facility space.
The above scenario is just an example, but there are many tactics to improve working capital that fall under Supplier Relationship Management (SRM). Therefore, it is important for CFOs to become familiar with procurement SRM systems and procedures to ensure that suppliers are managed against important financial KPIs. CFOs and CPOs must maintain a steady cadence or feedback loop to monitor critical suppliers and continuously manage goals and expectations.
When properly planned and executed, strategic purchases can be one of the most effective tools in a CFO’s arsenal for improving working capital. However, this is only possible when finances and purchasing are aligned with the organization’s target results. An open line of communication and a steady cadence during which the CFO shares company financial data and discusses how priorities, goals, and lead times align specifically with corporate financial goals. the company. Additionally, CFOs need to empower purchasing by defending departmental interests and reinforcing the need to adhere to policy.