Fridays (in 2023) means that it’s time for another CPO Rising Listicle. Each list will include a variety of procurement tips, trends, insights, research, lists, strategies, and/or recommendations designed to help procurement teams improve operations. We’ll also include a summary graphic for you to share with your team.
The relationship between the chief procurement officer and the chief financial officer is a complementary one that often goes unnoticed. An enlightened CFO understands the value that procurement brings, leading to more harmonious interactions and collaborative opportunities. This is essential, especially during challenging economic times like the present when there are higher interest rates. When interest rates rise, it becomes more expensive for companies to borrow money. This can have a significant impact on the relationship between the CPO and CFO of an enterprise.
As interest rates increase, the cost of financing working capital and capital expenditures can increase, which can put pressure on an organization’s cash flow. Thus, creating a situation where the CPO and CFO need to work closely together to find ways to reduce costs and optimize spending. For example, the CPO may need to negotiate better terms with suppliers to reduce the cost of raw materials, while the CFO may need to find ways to optimize the company’s working capital and manage cash flow more effectively.
Here are “Five Ways a Higher Cost of Capital Makes Procurement More Valuable to the CFO:”
- Cost savings: Procurement can help the organization save money on purchases, which becomes even more important when the cost of capital is high. By leveraging spend analysis, eSourcing, and other procurement technologies, the procurement team can identify cost-saving opportunities and negotiate better prices with suppliers. This results in improved cash flow and reduced financial risk for the company.
- Inventory management: The cost of holding excess inventory has gotten higher due to the high cost of capital. Procurement can help manage inventory levels by collaborating with suppliers to ensure timely delivery of goods and optimizing order quantities. This reduces the need for excess inventory and helps free up cash for other uses.
- Risk mitigation: Procurement can help mitigate the financial risk associated with purchases by ensuring that suppliers are financially stable and reliable. By conducting supplier due diligence and monitoring supplier performance, procurement can help minimize the risk of disruptions or financial losses due to supplier bankruptcies or other issues.
- Cash flow impact: Procurement can have a significant impact on the company’s cash flow, which is especially important in a rising cost of capital environment. By negotiating favorable payment terms with suppliers, optimizing inventory levels, and reducing overall costs, procurement can help improve the company’s cash position and reduce its financial risk.
- Supplier collaboration: Finally, procurement can work closely with suppliers to identify areas where the company can reduce costs and improve efficiency. This collaboration can lead to joint process improvements, co-development of new products or services, and other initiatives that generate value for both the company and its suppliers.
To summarize, when interest rates are high, the CPO and CFO relationship becomes more important because they need to work together to optimize spending and manage cash flow to mitigate the impact of higher borrowing costs. The CFO may need to work with the CPO to evaluate the financial impact of potential procurement decisions and ensure that the company is getting the best value for its money. At the end of the day, the CPO and CFO relationship is paramount to a top-performing enterprise.
RELATED RESEARCH
CPO Rising Listicle: Six Ways That a CFO Can Get Value From a Top-Performing AP Operation
Time to Rekindle the CFO-CPO Relationship
Financial Digitization’s Role in Helping CFOs Deliver Strategic Business Value
The CFO and the CPO: One World, Two Worldviews
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