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How does procurement impact the bottom line?

Opinion & Analysis
Whilst procurement activities contribute directly to the organisational value chain, many buyers are not aware of the value of their contribution.

Whilst procurement activities contribute directly to the organisational value chain, many buyers are not aware of the value of their contribution. Purchasing and Supply with Nyasha Chizu.

Chief finance officers (CFO) and chief procurement officers (CPO) acknowledge the increased influence of procurement in driving profitability and sustainability in business operations.

The real concern of the CFO is getting savings to the bottom line.

Some research on the contribution of the CPO to the CFO agenda revealed that CPOs lacked the skills to capture the financial activities that contribute to the bottom line.

Procurement professionals are expected to know and understand how their activities affect earnings before interest, tax, depreciation and amortisation (EBITDA), working capital, earnings per share and other lines of financial statements which the C-level executives are concerned with.

To avoid being the black sheep, procurement professionals need to speak the language and evaluate business performance the way the CFO does, so that they gel in the systems and hang around appropriately with the right crowd.

Businesses, periodically, are reviewed to ensure that a true and fair view of the current affairs is known to relevant stakeholders.

Trading accounts, balance sheet and cash flow are reviewed to assess the effects of external conditions such currency fluctuations that give an overview of the firm’s performance.

EBITDA identifies cash flow measured at one particular point in the overall cash flow cycle.

From an accounting perspective, EBIT captures the total operating income and total operating cost of the business.

The significance of EBIT is that it show whether the company is generated resources to pay interest to bankers, tax to government, dividends to shareholders, and maybe even repay loans after considering depreciation and armotisation – non-cash charge in the profit and loss.

Procurement staff needs to understand their role towards the activities that generate earnings and their contribution to achieving high rate of earnings after interest if they want to earn a seat in the boardroom.

Buyers need to understand accounting concepts such as working capital, working capital to sales and working capital days.

Working capital is the excess of current assets over current liabilities. Procurement strategies adopted by the procurement unit can erode or improve working capital position of an organisation.

If a buyer if capable to demonstrate how they are managing the working capital days and working capital to sales by adopting appropriate procurement strategies, then they deserve an opening at C-level.

To achieve the above, there is need to ensure that they is close working relationship between the CFO and the CPO. The objectives of the two if not properly managed could be at tangent.

The CPO is generally viewed as a spendthrift whilst the CFO is generally viewed as a gatekeeper or bean counter.

Both activities are essential for the organisation to function and what is very important is striking a balance between the spending and gate-keeping activities.

Realignment of the two important elements of the organisations cannot be over-emphasised. The two are autonomous and would need to operate independently to increase organisational operational efficiency.

Buyers are, therefore, encouraged to understand finance management so that they become effective through calculated risk management in procurement decision making that is supported by facts for the board to declare a vacant seat for the CPO in the boardroom. Nyasha Chizu is a Fellow of the Chartered Institute of Purchasing and Supply writing in his personal capacity. chizunyasha@yahoo.com