YQA – We need more revenue, why would we focus on finance and procurement functions?
- Posted by: David Watters
- Category: Best Practices
Over simplified answer:
In the current business environment its far easier to save a dollar than it is to earn a dollar. Whilst ‘selling more’ seems like the logical approach there are many savings that can be achieved by focussing on back office excellence, optimisation and automation.
In more detail:
Many businesses are facing increasingly tougher market conditions and improving profitability is a focus for every business right now.
Traditional business thinking has been focussed on increasing revenue and reducing costs of acquisition as a way to improve your overall profitability and as such these processes and procedures are typically, already, optimised and efficient as possible. However, an often overlooked and key lever for profitability that companies have is how they buy goods and services and pay for them.
Consider what businesses spend their money on, a large portion of spend cannot be influenced or reduced through greater procurement control or spend insights, this covers things like:
- Debt services
Spend like this is what is classified as non-negotiable spend. A conservative estimate for businesses is that around 75% of spend is non-negotiable. This leaves the remaining 25% classified as negotiable spend.
Reducing your negotiable spend through cost savings can have a big impact on your overall profit, Lets assume a business has $800m in revenue and runs a 10% profit margin. 75% of their spend is non-negotiable making up $540m. 25% of their spend is negotiable making up $180m.
If that business is able to reduce their negotiable spend by 7% (most analysts believe between 5%- 15% is achievable). This will result in a 16% increase in their profit or $12.6m. To achieve the same increase in profit through sales they’d have to increase their revenue by $126m.
Procurement and finance transformations don’t have to be complicated and we know how to make sure they’re successful.
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