Finance and procurement teams are your secret weapons to fight inflation

Finance and procurement teams are your secret weapons to fight inflation
4 minutes read

After 3 years of poor economic growth, households and businesses are fighting inflation. Rising prices caused by volatility in commodities and energy have driven up factory gate prices and service contract costs. Rising prices have also obfuscated the picture on the economy. Yes, that’s right, when stripping out the effect of inflation, real terms GDP has actually shrunk 0.4% from 2019 to the end of 2022. We are selling less and people are buying less, they are just forced to pay more for what they do buy. Unfortunately, the result in many businesses is reduced demand and successive price increases to compensate. This is a delicate balance before you lose customers – at what point does price inelasticity become price elasticity. So, read on as we look at how finance and procurement teams are your secret weapons to fight inflation.


Finance and procurement

For the purpose of this article, we are going to assume that you have both of these functions. Furthermore, for finance don’t just read bookkeepers, we mean an integrated finance function. For procurement, we don’t just mean onboarding suppliers and keeping records, we mean vendor management and a key element in a buying group. When these two teams work together, magical things happen. First of all, finance has a partner and a framework to leverage to control new costs into the business. Secondly, procurement has a key partner in the boardroom when looking for cost savings. The best CFOs and FDs tend to be very close to their procurement teams, especially in a businesses with a significant element of third-party expenditure. The best CPOs tend to work with finance to identify priorities and what the organisation needs to achieve it at what cost.

In some organisations, procurement might sit under finance. In others, they may both sit on the board and speak similar language. A few only have finance or procurement on the board and the relationship is neglected. Smaller companies may not even have a procurement function and the finance team merely looks after the books and brings in cash. Where finance and procurement don’t work side-by-side, organisations are leaving a key economic weapon off the inflationary battlefield.


Finance and procurement fighting inflation

It may seem obvious but businesses need cash to pay their debts when they fall due. If this ever becomes difficult, you had better hope that your line of credit is robust. Given that borrowing, even short-term in the form of an overdraft, tends to be expensive, especially during a period of tightening monetary policy, it would be better to keep cash in the business. In short, that means a judicious approach to discretionary expenditure, third-party contracts and cost transformation. Let’s tackle each of these in-turn:

1.      Discretionary expenditure

Costs that are deemed discretionary and are not critical to keep the business operational in the short-term. For example, travel, training, stationery, marketing, events, hospitality, overtime, reward & recognition etc.

2.      Third-party contracts

Costs that utilise people, equipment or services provided by a third-party organisation outside of your own business. For example, contractors, equipment rental, software, shared services, printing, warehousing, distribution etc.

3.      Cost transformation

Costs that a business can reduce by becoming more productive, reducing unnecessary activities, restructuring and cost-saving culture. For example, calculating cost drivers, overhead value analysis, lean six sigma, organisational design, ceasing unprofitable products etc.


Why not check out a related article on reducing your overheads.


Procuring what you need at the best price

It is tempting to think that procurement only helps with third-party contracts, since they are most obvious for tender. However, many large organisations also have contracts for travel portals, training providers, stationery suppliers, marketing agencies etc. These are all areas to run a competitive tender to ensure the best capability and value for money. Furthermore, cost transformation may involve outsourcing (or insourcing) for which new suppliers must tender for work. In general, most expenditure within an organisation should be tendered and suppliers properly vetted and onboarded. This increases value and lowers risk, in most cases.

In terms of third-party contracts, this is where procurement generally adds the biggest value. Sourcing possible suppliers, assessing capability, organising and running tender exercises are par for the course. This is where you would expect a finance function to be working with procurement to find areas for cost savings and striking the right balance between what you need, price and risk. After all, the temptation to ‘low ball’ means that some suppliers may fail to provide the stated level of service. It is about taking a measured risk with stakeholders understanding and accepting that risk.


Tail spend and purchase without PO

There are a few areas within organisations where cash leaks out of the business. One is referred to as ‘tail spend’, or a few of the smaller suppliers who are not subject to tender. Another is any channel or method of spending that does not require a PO. Small expense claims, low value purchase orders that don’t need approval and company credit cards. Whether these warrant action from finance or procurement will depend on business circumstances. Some businesses remove smaller suppliers with minimal spend, others resort to needing approval for any PO. If cash is critical for survival, nothing is off the table, before talking about salaries or headcount. Procurement would perhaps look to finance to support more draconian measures and encourage financial discipline.


Uniting finance and procurement

Here at Think Beyond, we help organisations at both the top and bottom of the value stick. At the bottom, we support efficient financial processes, cost control, vendor management and continuous improvement. We also don’t want your suppliers to decide to supply a competitor instead of you, we want a great supplier experience. Rather than enable what are sometimes called ‘random acts of violence’, we seek to help you transform and achieve more with less.

If you would like support with transformation and fighting inflation, simply get in touch with us. You can also send us an email request or ask us to give you a call back when suits you.

Finally, why not combine cost transformation with a business and commercial lens.