Finance for procurement ? It’s not rocket science!

Finance is often seen as complex, filled with jargon like P&L, COGS, & EBITDA.

But here’s the truth: finance is just numbers telling a story.
& in procurement, understanding this story helps us make smarter decisions.

Why should we care about Finance?

Procurement is about value & how we impact the company’s financial health.

If we don’t understand finance,
we can’t see the bigger picture!
Finance teams don’t just love numbers,
they use them to solve problems.
We can do the same?

So let’s break down some basics financial terms & that we should understand?

Profit & Loss Statement (P&L)

– Think of this as our personal monthly budget.
We have income (salary) & expenses (rent, food, utilities).

– What’s left at the end of the month? That’s our profit.

For a company, it works the same way:

Revenue: money coming in (like our salary)

COGS (Cost of Goods Sold): direct costs of making a product (like groceries if we’re running a restaurant)

Operating Expenses: other costs like rent, salaries, & marketing

EBITDA (Earnings Before Interest, Taxes, Depreciation, & Amortization): think of this as our net earnings before tax & loan payments

Net Profit: what’s left after all costs (our take home money)

COGS, why It matters for procurement?

COGS is directly influenced by procurement decisions.
If we negotiate better supplier prices or reduce waste, we lower COGS!
Lower COGS means higher profitability without needing to sell more.
That’s why finance loves procurement professionals:)

EBITDA: what does it tell us?

EBITDA is a key profitability measure.
A company with strong EBITDA is financially healthy.

If we can optimize costs without sacrificing quality, we boost EBITDA. It’s like managing personal finances, cutting unnecessary expenses without affecting our lifestyle.

So how can we apply financial basics?

Think beyond cost savings: cheaper isn’t always better.

Consider total cost, quality, & supplier reliability. A bad supplier can hurt production, leading to revenue loss.

We also need to understand the impact of our decisions !

Every dollar saved in procurement goes straight to the bottom line.
Finance teams appreciate us to think in terms of financial impact, not just price cuts.

Communicate in financial terms,
If we show finance how procurement improvements help EBITDA & cash flow, we gain credibility.
Saying “we reduced costs by $500K, improving EBITDA by 2%” is far more powerful than just saying “We saved money!”

Use data to tell a story
Numbers don’t lie. If we see supplier costs increasing, that’s a signal.
Just like checking bank statements tells us if we’re overspending, financial data helps us spot our inefficiencies.

Finally, Finance is not about memorizing formulas!
It’s about understanding how money moves through a business & how procurement impact the bigger picture.

What should we add/change?