Your company is getting good sales each month and you’ve been cutting down on costs, but somehow, your profits seem to disappear.
If you ever wonder why this is going on, well you’re not alone.
Many companies around the world, regardless of which industry and market they are in, seem to have an insufficient grasp of the most important details of their company, like who makes the purchases, where their purchases are coming from, what exactly are these purchases are, and whether or not these product or services are always bought from the same place at the same price.
In this entry, we will talk about the little-known method used to see where the profits disappear to – understanding purchases.
Why You Need to Take A Closer Look At Your Purchases
For many companies, their purchasing department and the financial departments are two completely different entities and isolated from each other, as the two departments become too busy on their own tasks.
The purchasing department of course, holds the key to making the process efficient for the financial department. In most cases however, these two departments don’t share a common goal.
The purchase-to-payment process is not comprehensively developed from end to end, resulting in inadequacies, if not shortcomings in management.
Or simply their tasks look completely different from different ends of the process.
Nevertheless, the financial department will usually be persistent in asking for cost-center codes, and placing references and electronic invoices from all the suppliers. While at the same time, the purchasing department may struggle in finding the proper reports for indirect purchases if each of the departments (including all subsidiaries) makes separate purchases independently.
These purchases of course, may end up in several invoice circulation systems.
Looking at the bigger picture, no one seems to be aware of the costs.
We sincerely hope this is not the case for your company.
What Constitutes a Bad Purchase?
Hastily Made Purchases.
There are also cases out there where purchases were hastily made, if not randomly.
The purchasing department paid little attention on their purchases, forgetting the agreements made on favorable terms. It can be either the department is not aware of such agreements, or the system is bureaucratic and inflexible.
Adventurous Staff Making Uninformed Decisions
Rather than using the company’s set system, problems on purchasing can also be caused by adventurous staff members making their purchase at a different store (either from a new online shop or nearby store) where shopping is entirely different.
The company’s system may not include required products, doesn’t come with up-to-date prices, or the number of items per pack may be too low or too high, or comparing products can be difficult to make.
Having a local store invoice the purchase may work nicely for the employees, as it can make everything extra convenient for them in making the purchase, however, the financial department may not be equally thrilled.
They may need to put a new supplier and search for the store’s information to determine who will approve the purchase, and what the proper cost centre is for the exception invoice.
This obviously, can cause conflict between the two departments.
As the leader of your organization, it is your job to challenge your financial department to evaluate its purchase-to-payment process, from one end to another.
This is the best way to gain real benefits from automating financial management routines.
Smooth purchase and fast invoice approval routines of course, can provide a positive effect across your organization.
You will see where and how your company is spending its money, and which specific component of the process brings in the highest benefits the second they’re made more efficient.