The COVID-19 pandemic underscored the need for better collaboration between finance and procurement as organizations needed to act quickly to increase their focus on their cash position, cash flow and net working capital through a more collaborative finance-procurement relationship.

The relationship each side has with suppliers is synchronistic – procurement ensures the right goods and services at the right price with the right supplier, and finance ensures those same suppliers are paid on time, to confirm that hard-negotiated relationships are not jeopardized.

But forthcoming survey research by Medius reveals that 30 percent of organizations have poor collaboration between procurement and finance.

In many instances, this is because most companies have separate procurement and finance organizations, however, ongoing digital transformation efforts are helping align these efforts for more cohesive source-to-pay strategies.

Procurement’s Role in Informing Payables 

Procurement understands supplier segmentation, which is a key skill to bring to the table. Segmenting the supply base to understand which suppliers are critical, and those that can be paid late to improve the cash position if necessary. By understanding the criticality of their supplier base, organizations can standardize on the best performing suppliers moving forward. When an organization wants to improve its cash position, it simply cannot pay key suppliers late, as that could negatively impact the supply chain.

Prior to COVID-19, many finance organizations had mostly manual processes for producing cash forecasts on a monthly basis. Insight into the value and priority of supplier payments is vital in the post-pandemic, companies need to report much more frequently -- weekly or even daily. This requires better tools such as spend management technology for visibility into cash forecasting for effective cash tactics and to improve collaboration between procurement and finance.

Overall visibility in the source-to-contract award process brings increased utility to organizations practicing multiple supplier sourcing via newfound capabilities to create and manage contracts with greater efficiency, visibility and audit control in the supply chain. Procurement also has a role to play regarding risk management. A communication and risk management plan should be implemented and developed for each new supplier. The potential risks of the relationship should be identified and then mitigated with sufficient compliance measures. In the past, this was an enormously time-consuming and manual, paper-based process, but today’s technology can auto-generate contracts based on pre-prepared information plugged into the system beforehand and from the RFP previously submitted to ensure supplier information is accurate. This digital access and efficiency has been of tremendous benefit, given the realities of the remote workplace.

Finance-Procurement Collaboration: Critical for Cash Flow

The call for procurement and finance to increase their collaboration is based on several needs, including having a better view of suppliers and cash flow management, both of the organization and of its critical suppliers, and the need for processes to run smoothly. While these are not new needs, they have become even more pronounced because the supplier payment process has become business-critical during this post-pandemic period.

With this in mind, CFOs need to show they are improving an organization’s cash flow. This can be done by paying suppliers late, instituting longer payment terms, or capturing every payment discount possible. The challenge is that each of these methods requires insight from procurement that the CFO generally does not have at their disposal. Once the decision to pay the supplier has been made, processing the payment in the most cost-effective and streamlined manner takes care of this “last mile” in the invoice-to-pay journey.

Why? Put simply, finance departments in general do not engage with procurement departments. And that’s a big miss, as procurement is the one department that has insight on how to segment suppliers.

By working with procurement, the finance department will have a better understanding of which suppliers can be paid late, which ones are critical, and which ones need the most help. Without this understanding, finance cannot begin to plan to improve its cash flow strategies and tactics.

By having a common technology platform and greater collaboration, procurement can not only interact to solve exception cases, such as an invoice not matching a PO or the unit price not matching the quantities, but can add insight that no other department has, resulting in a better cash strategy for both departments.

Navigating an uncertain business climate necessitates that a company understands its position in terms of all the invoices it has not yet paid. The CFO needs that outlook, and without a proper system in place and a collaborate process that involves those with the knowledge, then that job is extremely challenging.

It has taken a global pandemic for many companies to finally realize the urgent need for both procurement and finance to collaborate to get through an extraordinary 2020 and challenging year ahead – ironically forcing them to work closer while having to work remotely.