Procurement

The process of searching for, negotiating, and purchasing good and/or services from suppliers

What is Procurement?

In business, procurement is the process of searching for, negotiation, and purchasing goods and/or services from suppliers. The procurement process frequently includes a formal bid to ensure the best possible price, quality, and terms. The process can also be referred to as buying or purchasing.

 

Procurement - warehouse and inventory

 

Factors considered in procurement

Purchasing decisions at corporations typically involve a group of people and sometimes comprise their own department.

The main factors that purchasing professionals look at include:

  • Prices
  • Shipping, handling, and delivery
  • Special terms and condition
  • Volume discounts
  • Guarantees
  • Custom items
  • Payable terms (when payment is due)

 

Operating vs Capital procurement

Most businesses separate operating and capital expenditures, although they are likely negotiated simultaneously if from the same vendor or supplier.

Operating expenses are those that are expected to generate income within 12 months’ time. They include direct costs of manufacturing or generating sales.

Capital costs are those that are expected to generate revenue over a period of time greater than a year. Common examples of these costs include property, plant and equipment (PP&E), technology, patents, and other tangible and intangible assets.

 

Procurement and the budgeting process

Purchasing professionals often play a major role in a business’ budgeting and planning process. The purchasing officer’s input on how much the company should expect to spend is critical to effective planning. It is important for optimizing cash flow, earnings, and ultimately creating shareholder value.

Professionals working in a company’s financial planning and analysis (FP&A) group will likely build a financial model for the cash flow impact in the business.

 

Additional resources

Thank you for reading this guide to understanding the procurement process.

CFI is a global provider of the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To learn more and expand your career, explore the additional resources below:

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)™ by completing CFI’s online financial modeling classes and training program!