Finance 101

I get it, I at least I think I do.  Before I started working in first finance role I was clueless. Budget what? Accounting who?  How do expenses and savings change the bottom line (you mean the one on the floor?)

Luckily, I spent 5-6 years in a corporate finance role. I learned more about accounting, managing EPS and financial statements then I could have ever wanted. But it at least gave me a the chance to see, approve and analyze saving from the other side of the fence.

Savings Approval

The experience of approving the savings from our sourcing function was invaluable. I can still remember my first meeting where I said, “What do you want me to do with these (soft) savings?!”

During that meeting, I was thinking to myself – I couldn’t take it out of the budget, or move budgets around so what am I suppose to do with this?

Not to mention, the calculations she had used to come up with the numbers seemed ridiculous. At the end of it, I wasn’t sure if she had calculated savings or shown me how she had figured out time travel. The fact is, you shouldn’t need an entire excel notebook to figure out the difference in pricing, savings or the value you provide.

One of my hot buttons: When procurement / sourcing tries to claim large amounts of hard savings, when they are in fact just simple cost avoidance.

The Finance Switch

So when I decided to make the switch to Strategic Sourcing, I thought I’d be there with a good share of other finance colleagues. We all reported up to the CFO, so why wouldn’t have others made the switch? I was soon to find out the reality of why I had been the only one.

I gave a basic Finance 101 training to more than 100 of our internal Sourcing/Procurement folks the first month I was there. I was completely shocked by the lack of finance experience in the group. But it then started to make sense.

How can you figure out savings from a complicated set of figures, if you don’t have a background in analysis or basic finance? The short answer – you might, but you also might be able to build the death star with your calculations. Just sayin.

Since our procurement and sourcing functions, typically had diverse backgrounds (not in finance) it was the reason there were so many different types of calculations. It was also the reason for the huge disconnect between executive-level finance and Strategic Sourcing. And probably why at every company I’ve been at, we get in a major battle of the worlds, when explaining and gaining approval of our savings.

Finance’s Problem with Our Savings Reporting

If you take away the credibility issues that may occur with finance, there are still a mutlitude of problems with some of the savings reporting we do. So here’s a brief list of some of the worst offenses I’ve seen (from the other side):

1. Exaggerating numbers by using bad baselines. Ex: Using the highest of 3 bids or say a “rack rate” for media or a hotel room that nobody ever pays. Had an old colleague do this for media, and his old business partners and company tried tracking down since they had to take it out of their budgets. Budgets they didn’t have to begin with, and savings numbers that were larger than the budgets themselves. Ouch.

2. Multi-Year Savings Numbers – If it’s not incremental to the previous year, it doesn’t count. Ex: You saved 10% per year on a $1M contract of 3 years. This isn’t 100k/year; it is only 100k the first year. The rest is avoidance since your new baseline for year 2 is 900k. This one is a harder pill to swallow, I get it. But it’s budgeting basics.

3. Calling it savings, if the spend is the same due to the increase in the scope of work. Ex: I reduced the price of a project of $1M by 250k from negotiations, but the business partner then added more work, so it’s still $1M. Can you say avoidance? I had this issue a lot at Amgen. If you saved it, they spent it!

4. Overly complicated equations. I’m excited to see how the death star turns out for you this time, but please just keep it simple going forward.

5. Taking credit when it’s not due. If you weren’t there to negotiate, and they just happened to pick a cheaper supplier – yes there is savings involved. No, you don’t get to take credit because you over heard it in the bathroom.

How to Win with Finance

Since I’ve came from the other side of finance, I’ve got a few tricks up my sleeve. And wanting to be a good Procurement / Sourcing Citizen, of course I will share with you! So here are a couple of things you can do to facilitate a better conversation (and avoid putting on your battle gear).

• Know how much was initially budgeted for the project / category
• Have your business partner attend/approve your savings via email (Ex: hey bob, we saved 100k on this – do you agree?) can go a long way for credibility
• Be able to past the red face test. Twice. Be overly conservative in your estimates if you have to.
• Be exact with your numbers (Finance ties to the penny and they will expect you to do the same)
• Keep it simple and black and white. No time machines. No death stars. And no gray area when reporting numbers. Ever.

When all else fails, and you need approval bring them lunch/dinner at budget time or quarter end. I promise, you’ll be BFF’s for ever after that.

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The Finance – Procurement Disconnect

Want to know more about why finance and procurements numbers never match? Well check out this article/pdf download from GEP.