Procurement and Finance: Converting Contracts to Cash

Procurement and Finance: Converting Contracts to Cash

The role of procurement is critical in driving a company's profits. Their responsibilities involve making important decisions with significant impact while collaborating with both internal stakeholders (such as finance and sales) and external stakeholders (including suppliers). One of their main tasks is to balance the expectations of all parties involved by constantly mediating between different sets of expectations to achieve satisfaction and shared understanding, particularly in areas like rebates and contracts.

However, the complexity of contracts that can span several years with multiple components can pose a risk for breakdowns in the procurement process. In some cases, a single contract may contain as many as 150 different elements. Unfortunately, this is where things can often go wrong. This blog explores the post-contract negotiation process that is essential in ensuring that financial gains are achieved.

Risks Involving Procurement Contracts

  • Locating contracts

According to a report in the Journal of Contract Management, 71 percent of companies couldn't find at least 10 percent of their contracts. The definition of a contract in this context can range from an email exchange that captures the details of two trading parties, to rebate deals with tens of thousands of suppliers. In the wholesale distribution industry, it's common to have a huge number of contracts, some with expressed terms and others without.

Even if a contract is present, there can be issues. For example, a contract could be several years old, and a lot could have changed since its creation. In such cases, it may take multiple emails to reconcile the differences between the contract and the current reality. In the end, even if companies have contracts in place, they may not be perfectly aligned or used to their full potential.

  • Misinterpreting a Deal

Mistakes can happen due to misinterpreting a deal, not because of poor wording, but due to your own misinterpretation. For example, when a price is supplemented by a rebate and subject to periodic fluctuations for particular contracts across various locations, things can get complicated quickly. This can create misunderstandings between suppliers and procurement, which can create gaps in their relationship.  

It's important for the commercial function to approach this with a nuanced perspective, rather than a simplistic binary one. They should work to find ways to make the situation better, while still maintaining a positive relationship between the parties involved. This requires setting clear expectations, being transparent in communication and collaboration, and emphasizing the importance of procurement and collaboration.

  • External market factors

It's important to gather risk information from external market forces and incorporate it into your decision-making process when negotiating new deals. Building trust with not only the finance team but your trading partners enables you to have open conversations about potential risks and their potential impact on your business; you can take proactive measures to mitigate them.

  • Key person dependency

If there is a single point of failure in your business, it poses a significant risk, as people may leave at any time. When only one person understands a particular deal, you become overly reliant on them. The finance department can be of assistance in such situations. For example, if procurement personnel changed, and the new person approached finance seeking clarification on inherited contracts. They could then spend time with procurement, explaining the meaning behind certain terms and interpreting supplier behavior.

  • Product availability and allocation

After procurement has obtained a signed contract and everything seems to be in order for commercial reliance, they must take into account factors like product availability and potential allocation issues. These factors have the potential to cause major disruptions to plans, resulting in volatile pricing and affected rebate rates, essentially resetting everything. This was evident during the COVID-19 pandemic, which caused significant disruptions to contracts that had been signed just weeks earlier, based on a completely different outlook. Therefore, it is crucial to be prepared to refocus and adapt to changing circumstances in order to address the new reality.

Adding Value After the Contract is Signed

Procurement is responsible for negotiating contracts and sourcing goods and services at the best possible prices, which can directly impact on a company's bottom line. While procurement negotiations can sometimes be challenging, the goal is always to find a win-win solution that benefits both parties. Good negotiation skills are crucial in finding a middle ground where both the supplier and the business can be satisfied with the terms of the agreement.  

It's important to note that the procurement process is an ongoing effort that extends beyond the signing of a contract. In addition to renegotiating terms and securing supplies, procurement is responsible for monitoring supplier performance. This involves ensuring that contractual obligations are being met and that both parties are benefiting from the rebate agreement.

While monitoring supplier performance may seem like a finance function, it's important for procurement to stay informed about potential risks and issues. Communication between the two departments is crucial, as finance may be able to identify problems before procurement does. This can be especially important in the final stages of negotiation, where critical information can tip the scales in favor of one party or another.

Procurement is also responsible for ensuring that financial targets are being met, such as volume incentives. This can involve significant effort to consolidate information and validate results, but it's crucial to avoid missing opportunities or making uninformed decisions. Ultimately, the ability to make informed decisions is the most important aspect of procurement's role.

Procurement and Finance: Generating Cash Together

Typically, different departments in an organization are structured around their own unique functions, objectives, and operations. Procurement and finance departments are no exception, even though their relationship is heavily intertwined. For profitable growth, it is vital that procurement and finance teams work together in harmony.

In terms of contracts, a competent finance team should educate procurement on accounting rules and regulations and how to abide by them. They should also provide insight into changes in contracts from year to year. To avoid misunderstandings or misinterpretations, it is crucial to have a shared understanding of terms and language, which is why transparency is vital. Both parties should have complete visibility into financial matters, such as what money is being accrued and paid to suppliers. This can be achieved through ongoing dialogue throughout the year, where any issues or changes are communicated as soon as possible to avoid negative impacts on the business.

Data is a critical component in making informed decisions in procurement. Instead of waiting for issues to arise before seeking answers, it is advantageous to establish a good working relationship with finance partners. This can lead to ongoing data analysis that highlights potential opportunities for cost savings or process improvements. When providing data to finance partners, it is essential to understand their specific requirements and present information in a meaningful way.

Procurement involves continuous negotiation, explanation, and decision-making. When changes occur, it is essential to communicate with finance partners to ensure that everyone is aware of the implications and potential opportunities for further savings or improvements. Ultimately, the relationship between procurement and finance should be characterized by collaboration and a shared goal of generating profits for the business.

Want to align your procurement and finance teams on your rebate agreements? We have a collaborative rebate management platform just for you!

Elizabeth Lavelle

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