How closed-loop accounting helps procurement deliver bottom-line savings

A solution has been proposed for a frustratingly familiar scenario in procurement: a successful effort…...

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A solution has been proposed for a frustratingly familiar scenario in procurement: a successful effort to achieve major cost reductions on a new initiative is announced, but the stated savings never reach the bottom line because other business unit leaders have swiftly ‘snaffled’ them to plug budgetary holes or finance a priority project.

For procurement experts David Schannon and Chuck Miller, the loop between different accounting systems that don’t mesh must be closed.

Procurement teams use category management to calculate savings on different kinds of goods, such as printer ink or travel.

Business unit leaders, however, spend according to their budgets.

If a procurement team negotiates a better price for computer equipment, for example, then business unit leaders will often rapidly seize the savings for other spends.

A ‘closed-loop accounting system’ captures these savings before they vanish down organisational black holes by bringing together heads of procurement, accounting and financial planning with budget owners so that they are all seeing the same numbers simultaneously – this way, they can jointly determine the best use of the savings.

One means of setting up such systems is for category management practitioners to complete standard savings forms for each initiative that detail targeted cost savings and whether the expenses were included in budgets.

Weekly meetings between procurement managers, accounts teams and financial planning colleagues can then validate these savings before business unit leaders are called in to quantify the reduction in their budgets due to procurement gains.

Real savings can be achieved this way, and previously invisible ‘snaffling’ can be virtually abolished.

While no business unit will be happy to hear that its budget is being reduced halfway through a year, Schannon and Miller believe that this can be managed.

They said that in their experience, the most effective method is to anticipate procurement savings beforehand and then include them during the period when the budget is being set up.

They added that this gives an incentive for business unit leaders to closely work with the procurement team during the year to attain targeted savings.

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