Financial Impacts of Procurement Beyond Income Statement Savings
There is a common misconception that the primary (or only) way procurement and finance overlap is through costs savings; however, the financial implications of procurement extend far beyond the obvious impact of a reduction in expenses and subsequent increase in savings and bottom-line profit. These include effects to the following:
- Income statement
- Balance sheet
- Statement of cash flows
Income Statement
When procurement experts are able to obtain cost reductions via strategic sourcing, companies obtain a reduction in expenses. This leads to higher earnings before interest and taxes (EBIT), as well as a higher net profit.
Balance Sheet
Cost savings will also reward companies in the form of increased cash on hand and reduced liabilities (accounts payable). This will increase firm liquidity and help allay any potential concerns regarding firm solvency.
The key purpose of capital expenditures is to generate more return via fixed assets. If a company can meet its procurement needs with fewer capital expenditures, it will generate a higher-level fixed asset turnover. This provides a higher return on assets (ROA), and investors seek out companies that can generate stronger ROAs.
With the increase in net profit, stockholders become more satisfied with company performance, in part because they gain a subsequent increase in earnings per share (EPS).
Finally, an increased net profit will improve a firm’s retained earnings. This is the amount of net income remaining after the firm has paid out dividends to its stockholders and it is used for purposes of reinvestment within the business.
Statement of Cash Flows
With reduced cash outlay, business will naturally have more cash on hand to re-invest within the business. Not only is additional cash beneficial from the standpoint of better meeting debts and short-term liabilities, it also provides to opportunity to utilize cash for the purposes of investing.
Why is this important?
The financial savings realized from the lens of cost avoidance are not recognized by finance professionals. Furthermore, these savings are not indicated anywhere on financial statements, which downplays the importance of implementing effective procurement strategies and hiring procurement professionals to assist with the process. Procurement experts are in a unique position to significantly affect the bottom line. It is critical that companies realize the importance of procurement experts in their business practices. Once procurement professionals gauge and report the financial implications beyond dollar savings, they can then communicate these to upper-level management and shareholders.
References
https://www.procurement-academy.com/procurement-competences/financial-management/
https://www.zycus.com/blog/strategic-sourcing/measure-procurement-profit-loss.html
Subscribe to Arroyo Strategy Insights to access whitepapers, presentations, plus our latest thought leadership.
