Treasury and procurement: the joined-up approach

Treasury and procurement often operate in siloes – but by building a closer relationship, the two functions can approach working capital in a more joined-up way, yielding better results for the organization. Discover which strategies the experts recommended at our latest SAP Taulia Treasurers Club event.

Treasury and procurement often seem to operate in different worlds. Treasury is focused on optimizing liquidity and managing risk, while procurement’s remit includes controlling costs and suppliers.

But the two functions also have plenty of areas of common ground. For example, a contract with a supplier is essentially a financial instrument which has implications for working capital, liquidity and risk.

Without a clear understanding of each other’s goals, treasury and procurement can have different views on topics such as cost saving metrics, working capital solutions, and operational processes – often resulting in a certain degree of friction. But if the two functions can collaborate effectively, they will find significant opportunities to unlock savings and improve efficiency.

At a recent SAP Taulia Treasurers’ Club event, industry experts discussed some of the key pain points that can arise when treasury and procurement are not on the same page – and explained how nurturing a mutual understanding can yield better results.

The banking paradox

Working capital management is a cross-functional effort. But from procurement’s point of view, challenges can arise when collaborating with treasury on working capital solutions – particularly when this means engaging with banks.

Treasurers often rely on their banking contacts to advocate for the company internally on topics such as credit lines and revolvers. As a result, they may be wary about damaging the relationships they have spent years building.

For example, issuing a formal Request for Proposal (RFP) to the company’s preferred relationship banks may sound like a reasonable approach. But in practice, treasurers may be concerned that treating banks like standard vendors may alienate their important advocates.

Other approaches may prove more fruitful. For example, the treasurer, together with procurement could invite the company’s top vendor selections, including banks, to independent transparent conversations. By allowing banks and other vendors to make their pitch in a less formal setting, treasurers can avoid damaging key relationships. Alternatively, teams can clearly delineate responsibilities such as procurement managing the technology selection, while treasury maintains final approval over the participating funders.

The ‘cost avoidance’ trap

Not all cost savings are alike – and frustration can arise when procurement reports ‘cost avoidance’ savings that treasury cannot identify on the balance sheet. This creates a credibility gap, in which treasury views the metrics used by procurement as ‘imaginary money’.

Clear communication is needed upfront to ensure that savings are quantified in a way that treasury can easily recognize. Procurement professionals can achieve this by working proactively with treasury to pre-approve the savings methodology being used before any work begins.

Another effective approach is to highlight procurement wins by spelling out their impact on relevant metrics such as Earnings Per Share (EPS). By showing how much cash is needed to move the EPS needle, procurement can speak a language that the CFO and treasurer instantly respect.

M&A: bringing order to chaos

Managing vendors in an M&A scenario is another common area of friction. During acquisitions, companies may end up in a situation where different business units are paying the same vendor on completely different terms.

Again, procurement and treasury need to work together to get the best outcome for the company. One effective approach is to create a ‘clean room’ to consolidate all contracts and gain a detailed understanding of the different terms, rates, and expiration dates currently in play.

With a clear view of the existing situation, companies will be better placed to identify which entity has the best terms with a particular vendor and standardize these terms across the organization. This, in turn, can help the company meet joint targets relating to the acquisition.

Operational readiness

Banks are often quick to offer companies access to early payment products. But while the benefits may be appealing, companies are often hindered from taking advantage of these products by their own slow back-office processes.

For one thing, delays in the invoice approval process can reduce the benefits of an early payment program. If approving an invoice takes 20 days, the opportunity to offer early payment to suppliers will be considerably truncated.

By addressing these process issues, companies will be better placed to make meaningful changes. In some cases, this means looking for tools that can sit above multiple ERP systems and provide consistent access to data.

In other cases, companies may take advantage of business process outsourcing (BPO). But processes need to be as efficient as possible before being outsourced – and likewise, it’s important to ensure continuity between the company and the BPO provider so that strategic goals aren’t missed.

Better together

In conclusion, treasury and procurement may be separate functions – but optimizing working capital requires a joined-up approach.

By sharing information and proactively discussing developments that could affect the other function, treasury and procurement can gain a deeper understanding of each other’s pain points. Likewise, they can identify any mismatches between their metrics and goals.

The bottom line: with both functions on the same page, the organization will be better placed to capture savings, operate more efficiently, and make the most of its working capital.

To learn more from our network of Treasury experts, sign up for the SAP Taulia Treasurer’s Club