The purchasing function is often seen as a cost-killer in the corporate world. On the other hand, finance staff are known as lone wolves who are out of touch with the rest of the organization. But this is a misconception: purchasing and finance focus on similar issues, so they need to work together on a regular basis. Here are some tips on aligning these core functions.
I. What causes purchasing and finance to be misaligned?
Different perspectives
Regardless of a company’s size, many notice that their purchasing and finance departments are not on the same page, which can lead to friction and misunderstandings.
The first disconnect involves measuring savings, a source of mixups when sharing information. For example, finance sees cost-cutting through the lens of spending reductions, while purchasing focuses more on lowering prices.
The result is that finance doesn’t actually factor in the cost avoidance that purchasing measures. The same applies to other criteria that can be crucial, such as purchase coverage rate, dependency rate and quality indicators.
Little-known yet closely related issues
It’s an open secret that purchasing and finance departments tend to hit a brick wall that’s largely attributable to ignorance of the other side’s challenges and objectives. But their goals are actually quite similar:
- Reducing costs to secure cash flow and steer the company toward good financial standing
- Optimizing operational efficiencies by streamlining and automating processes
- Managing vendor-related risks like fraud, unexpected malfunctions and lack of CSR requirements
- Preventing unapproved purchases to maximize visibility on spending and budgets
- Fully assuming the business partner role for all operational departments
Two different languages
The problem is that purchasing and finance do not speak the same language! They actually work with very different KPIs, which causes misunderstandings and impedes collaboration:
- Finance is focused on WCR (working capital requirements), profitability and growth indicators, and financial and operational performance.
- Purchasing approaches spending from a perspective of optimizing costs and measuring TCO (total cost of ownership).
In addition to financial matters, purchasing departments also secure the supply chain, anticipate supplier-related risks, spark innovation and support CSR efforts.
II. Four strategies for aligning purchasing and finance
1. Set some collaboration ground rules
Establishing a common way of working based on similar approaches helps align both departments on issues and KPIs. For example, they need to agree on how to:
- Measure cost reduction and related KPIs
- Monitor and report vendor-related risks like financial health and dependency rate
- Minimize invoice disputes by reconciling orders and invoices, and by meeting payment deadlines
2. Centralize the supplier repository
Collaboration can be streamlined by creating a shared know your supplier (KYS) database. The goal is to keep everything in the same repository and standardize processes for creating and approving suppliers. This makes it easier to find data and improves the relationship between purchasing and finance.
3. Encourage communication
When the purchasing and finance departments communicate well and use the same vocabulary, it’s possible to:
- clarify each one’s roles and responsibilities,
- open a dialogue between them based on shared experiences like steering committee meetings, and
- ensure a smooth and effective flow of information.
This can only happen when buyers and finance personnel are educated about what matters to the other department.
4. Attach value to collaborative projects
One way to create a stronger bond between purchasing and finance is to have them review quantified results together. These initiatives give them a chance to acknowledge each other’s wins that involve both departments. Looking at everyone’s projects and achievements from all angles further reinforces the trust and transparency between finance and purchasing.
None of these strategies can be implemented unless the two departments are in constant communication. A key component of this model involves using a tool that centralizes data and customer knowledge because it streamlines information-sharing and collaboration.
III. How digital technology catalyzes synergies between purchasing and finance?
Digital solutions like Source-to-Pay streamline collaboration between the purchasing and finance departments by:
- creating purchase orders, which are a good way to keep unapproved purchases at bay and gain visibility on budgets and spending,
- preventing fraud by verifying supplier bank details,
- consolidating real-time interactions between purchasing and finance,
- making it easier to share key information and KPIs, and
- measuring each team’s impact on a level playing field.
In addition to fostering collaboration between purchasing and finance, digital tools also help both departments become more reliable and effective by:
- optimizing the scheduling, tracking and management of purchasing projects,
- generating automated reports for more accurate spending control,
- issuing real-time alerts so they can respond quickly and prioritize measures to prevent supplier risks,
- complying with regulatory requirements (Sarbanes-Oxley [SOX]),
- collaborating on non-financial reporting, particularly for the CSRD (Corporate Sustainability Reporting Directive), and
- making it easier for purchasing teams and advisors to share information and conduct audits.
Digitization is also turning into a real recruitment driver, which is important to both the purchasing and finance departments.
As you can see, onboarding digital solutions like Source-to-Pay can build better alliances between the purchasing and finance departments. Most likely, you’ll need an expert to help you implement this type of solution. Let Fluxym be your guide!