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Ways to Measure Procurement Profit and Loss for your Business

By Rohitkumar Nair
In Strategic Sourcing
Jan 31st, 2012
0 Comments
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Ways to Measure Procurement Profit and Loss for your Business

In this article, you’ll learn about documents to audit to figure your procurement profit and loss to determine the role it plays in your business.

Coming to terms

When things were tough, organizations rely on procurement. World wars, oil embargos, and recessions are a few of the events that highlight the significance of responsible procurement. Slowly, organizations around the world are trying to realize the potential of the procurement function. Consequently,  organizations are relying on the efforts of their procurement professionals to deliver procurement profit and loss.

The Potential of Procurement

Procurement professionals have leveraged technology in numerous areas of procurement to ensure it delivers value to the bottom line. In addition to financial contribution, procurement has also added value to organizational processes. Because of this,  procurement is given a strategic positioning.

Areas for Procurement to Contribute

As procurement continues to evolve from an administrative process to a more strategic function, its objective is to contributing towards organizational success. Below are the documents to audit to measure how much maverick purchasing has affected the business’s financial accounts.

Balance Sheet

Assets: Cash & Inventory

Liabilities: Accounts Payable

Income Statement

In a manufacturing company, Cost of Goods Sold (COGS) is a significant area in which procurement can impact apart from the Selling and General Administrative Expense (SGA). These two have a direct impact on the Earnings before interest & Tax (EBIT) for organizations. In addition to that, procurement very often presents its own set of numbers for savings which don’t appear in the P&L account/balance sheet of organizations. A significant reason for this has been the fact that procurement usually gives a lot of importance on the term ‘cost avoidance’ which indicates the reduction in spends against the normal spend if cost avoidance exercises had not been undertaken.

Typically, in this case, procurement will speak of the savings it generated through cost avoidance, but for finance professional, this savings is not visible in the financial statements of the organization raising disputes between the two functionaries. Some of the challenges faced by procurement professionals in speaking the language of finance;

  • Common alignment of targets: This has to do with having a common perception of the savings generated by procurement
  • Generating internal efficiency: Avoid internal process duplication and understand the deliverables expected from the finance and procurement functions

Conclusion: Enhance Procurement’s Visibility

Finally, we know the scope of procurement and the challenges it faces. Seems like it is time we fully acknowledge prcorement’s competencies and therefore help it  visiblity gain the visibility of its impact on the bottom line. Therefore, to be able to successfully measure procurement profit and loss, let us-

  • Collaborate
  • Set mutually acceptable goals
  • Create processes to track the progress on the target &
  • Finally, validate procurement savings translated in the financial reports.

 

About "" Has 36 Posts

Rohit Kumar Nair is Associate Director Marketing at Zycus Inc., a provider of Source-to-Pay automation technology. With close to 10 years of experience covering multiple facets of marketing in the IT & Health Care domain, Rohit currently leads the product marketing initiatives for the Procure-to-Pay solution suite at Zycus Inc.

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