Working Capital: The Link Between Procurement, Finance, And Treasury

Jeff Scott

Part 1 of a 3-part series focusing on how businesses can get started on an effective working-capital optimization initiative. Read Part 2 and Part 3.

There is an old adage that you cannot manage what you do not measure. In response to this conventional wisdom, numerous key performance indicators (KPIs) have been developed in the core working-capital functional teams of procurement, finance, and treasury.

The overarching goal is simple: Strong supplier relationships AND operational efficiency AND strategic value. All three? That’s a challenge, as each team has a different set of tactical objectives and, at times, different strategic goals, that often compete with each other.

Which piece of the cash conversion cycle do procurement, finance, and treasury teams all care about?

Procurement. The procurement department may review multiple catalogs or price lists from different suppliers to cross-check best pricing, confirm availability, and plan out lead times. Procurement also checks if there is a contract in place to ensure volume pricing and agreed-upon payment terms. Getting the best price is important to keep costs low, which will be reflected in a purchase-price variance metric at month end. Lastly, procurement confirms payment instructions with the vendor to ensure that there haven’t been any changes in physical addresses or bank instructions for payment.

In summary, procurement cares about the supplier relationship and ensuring the best pricing of goods or services contracted on behalf of the company.

Finance and accounts payable (AP). Finance and the AP team ensure that payments are made accurately on time. Generating purchase orders or issuing payments for goods and services takes time. Getting these steps wrong could mean that you’ve overpaid or sent a payment in error. The AP staff may be the last people in the company to ensure that instructions for large-ticket expenditures are properly signed off on and payments are being directed to the right suppliers. Correcting mistakes after the fact can be costly and time-consuming.

In summary, finance cares about processing costs and accuracy. They care less about the strategy of when to pay or the value of the goods or services than the price.

Treasury. Companies have finite amounts of cash to deploy to support their business activities. That finite resource is managed and protected by treasury, which ensures that cash on hand is held securely and put to use at the highest possible APR (vs. weighted average cost of capital, or WACC). Treasury also ensures that cash is generated via the highest possible days payable outstanding (extending terms to hold onto cash). Treasury manages the risk to cash, whether it’s from evaluating counterparties, testing internal process controls, or acting to mitigate market fluctuations impacting exchange or interest rates.

In summary, treasury cares about the amount of cash generated, the value earned for deploying cash, and protecting cash once received. They care less about what that may mean for a supplier relationship or AP’s general processes.

How to harmonize

Although each department has its own measurements to manage success, the strategic mandate from the executive team is a blend of supplier relationship, operational efficiencies, and strategic value. A best practice is forming a working capital steering committee with representatives from procurement, finance/AP, and treasury. The collective goal is to unlock working cash flow, which is a proxy for organizational health and operating efficiencies while ensuring that you do not introduce undue risk to the supply base or damage key relationships.

A simple example of a harmonized goal is to segment the supply base into categories and determine the optimal payment channel for those suppliers. You may choose to present a certain vintage of suppliers with early-payment discounts whereby reverse-factoring is used. This potentially meets the needs of all three organizations:

  • Procurement – Suppliers are happy because they are paid early.
  • Finance/AP – Use of technology ensures workflow to make payment easier and more efficient.
  • Treasury – Bank pays supplier day 10, company pays bank day 90, therefore unlocking working capital. (If the company has excess cash, this could be done simply via dynamic discounting, where the company pays the supplier with its own cash on day 10 and earn a higher APR vs. WACC.)

In this scenario, every team wins AND the supplier wins. Often, one of these three teams is spearheading one aspect of a working capital project. Example, procurement may be reviewing terms as part of contract review. Finance/AP may be reviewing processes to move to electronic payments. Treasury may be looking for ways to generate cash. The issues emerge when there is a lack of transparency and lack of alignment in the strategy. Forming a working capital steering committee allows these projects to be managed cross-team and creates the appropriate change-management framework to ensure that every team wins (including the supplier).

In Part 2 of this series, we will talk more deeply about the methods and technology available to unlock the power of this steering committee.

More information on how you can optimize working capital through payables, receivables, and inventory management.

More information on aligning procurement, finance, and treasury teams to optimize working capital management.

Follow SAP Finance online: @SAPFinance (Twitter)  | LinkedIn | FacebookYouTube


Jeff Scott

About Jeff Scott

Jeff Scott of Nitor Partners is an experienced leader with deep expertise and over 15 years in finance, treasury, blockchain, AI, FinTech, and banking operations. He has held executive roles spanning the wide spectrum of Fortune 500, private equity, family-office, privately held businesses, startups, and as CEO of a midsize company. He has successfully reengineered lines of business; led companies through acquisitions, turnaround efforts, and multi-year, multi-million-dollar strategic programs; and helped teams through the gut-wrenching exercise of coming together around a new and exciting path forward.