FAQs (Frequently asked

questions)
Q: What is procurement finance?
A: Procurement finance refers to the strategic management of a
company’s finances in relation to its procurement activities.It
includes budgeting, purchasing, invoicing, and payment processes.
Q:How can communication barriers between finance and
procurement be overcome?
A: Regular meetings, clear communication channels, and shared
goals can help bridge any communication gaps.
Q: What role does procurement finance play in business
performance?
A: Procurement finance plays a crucial role in managing costs,
optimizing cash flow, and maintaining strong supplier relationships,
all of which contribute to improved business performance

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

What is Procurement?
In business, procurement is the process of searching for, negotiating, 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.

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

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  Special terms and conditions
 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. 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 and 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 of 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 CFI resources below:

 Operating Budget
 Budget Head
 Cash Flow Statement
 Cost of Capital

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 What is an Operating Budget?

An operating budget consists of all revenues and expenses over a

period of time (typically a quarter or a year) that a corporation,
government (see the U.S. 2017 Budget), or organization uses to plan
its operations. An operating budget is prepared in advance of a
reporting period as a goal or plan that the business expects to achieve.
Below is an example of a downloadable budget template and an
explanation of how to prepare one.
What is the Statement of Cash Flows?
The statement of cash flows (also referred to as the cash flow statement) is
one of the three key financial statements. The cash flow statement reports
the cash generated and spent during a specific period of time (e.g., a month,
quarter, or year). The statement of cash flows acts as a bridge between the
income statement and balance sheet by showing how cash moved in and out
of the business.

Why is the Cash Flow Statement Important?

“Cash is king” is an old saying about business. Since the income statement
and balance sheet are based on accrual accounting, those financials don’t
directly measure what happens to cash over a period. Therefore, companies
typically provide a cash flow statement for management, analysts and
investors to review.

Another useful aspect of the cash flow statement is to compare operating

cash flow to net income. This comparison measure how well a company is
running its operations. The cash flow statement reflects the actual amount of
cash the company receives from its operations.

Cash Flow Definitions

Cash flow: Inflows and outflows of cash and cash equivalents (learn more in
CFI’s Ultimate Cash Flow Guide).

Cash balance: Cash on hand and demand deposits (cash balance on the
balance sheet).

Cash equivalents: Cash equivalents include cash held as bank deposits,

short-term investments, and any very easily cash-convertible assets —
includes overdrafts and cash equivalents with short-term maturities (less
than three months).

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Cash Flow Statement Sections
Below is a breakdown of each section in a statement of cash flows. While
each company will have its own unique line items, the general setup is
usually the same.

1. Operating cash flow

Operating activities are the principal revenue-producing activities of the

entity. Cash flow from operations typically includes the cash flows associated
with sales, purchases, and other expenses.

The company’s chief financial officer (CFO) chooses between the direct and
indirect presentation of operating cash flow:

 Direct presentation: Operating cash flows are presented as a list of

cash flows: cash in from sales, cash out for operating expenses, etc.
This is a simple but rarely used method, as the indirect presentation is
more common.
 Indirect presentation: Operating cash flows are presented as a
reconciliation from profit to cash flow. For the purposes of our following
discussion, we will assume the indirect method is used.

The items in the operating cash flow section are not all actual cash flows but
include non-cash items and other adjustments to reconcile profit with cash
flow.

Plus: depreciation and amortization (D&A)

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The value of various assets declines over time when used in a business. As a
result, D&A are expenses that allocate the cost of an asset over its useful
life. Depreciation involves tangible assets such as buildings, machinery, and
equipment, whereas amortization involves intangible assets such as patents,
copyrights, goodwill, and software. D&A reduces net income in the income
statement. However, we add this back into the cash flow statement to adjust
net income because these are non-cash expenses. In other words, no cash
transactions are involved.

Plus/(less): changes in working capital

Working capital represents the difference between a company’s current

assets and current liabilities. Any changes in current assets (other than cash)
and current liabilities (other than debt) affect the cash balance in operating
activities.

For instance, when a company buys more inventory, current assets increase.
This positive change in inventory is subtracted from net income because it is
a cash outflow. It’s the same case for accounts receivable. When it increases,
it means the company sold their goods on credit. There was no cash
transaction even though revenue was recognized, so an increase in accounts
receivable is also subtracted from net income.

Conversely, if a current liability, like accounts payable, increases this is

considered a cash inflow. This is because the company has yet to pay cash
for something it purchased on credit. This increase is then added to net
income (a decrease would be subtracted).

2. Investing cash flow

Cash flow from investing activities includes the acquisition and disposal of
non-current assets and other investments not included in cash equivalents.
Investing cash flows typically include the cash flows associated with buying
or selling property, plant, and equipment (PP&E), other non-current assets,
and other financial assets.

(Less): investments in PP&E

Cash spent on purchasing PP&E is called capital expenditures (CapEx). CapEx

investments might mean purchases of new office equipment such as
computers and printers for a growing number of employees, or the purchase
of new land and a building to house business operations and logistics of the
company. These items are necessary to keep the company running. These
investments are a cash outflow, and therefore will have a negative impact
when we calculate the net increase in cash from all activities. Learn how to
calculate CapEx with the CapEx formula.

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3. Financing cash flow

Cash flow from financing activities results from changes in a company’s

capital structure. Financing cash flows include cash flows associated with
borrowing and repaying bank loans or bonds and issuing and buying back
shares. The payment of a dividend is also treated as a financing cash flow.

Issuance (repayment) of debt

A company issues debt as a way to finance its operations. The issuance of

debt is a cash inflow, because a company finds investors willing to act as
lenders. However, when these debt investors are paid back, then the
repayment is a cash outflow.

Issuance (repayment) of equity

This is another way of financing a company’s operations. Issuance of equity

is an additional source of cash, so it’s a cash inflow. Conversely, an equity
repurchase is a cash outflow. This is buying back, through cash payment, the
equity from its investors.

4. Net increase/(decrease) in cash and closing cash balance

We sum up the three sections of the cash flow statement to find the net cash
increase or decrease for the given time period. This amount is then added to
the opening cash balance to derive the closing cash balance. This amount
will be reported in the balance sheet statement under the current assets
section. This is the final piece of the puzzle when linking the three financial
statements.

Opening cash balance

The opening cash balance is last year’s closing cash balance. We can find
this amount from last year’s cash flow statement and balance sheet
statement.

Learn how to analyze a statement of cash flows in CFI’s Financial Analysis

Fundamentals course.

Statement of Cash Flows Example

Below is an example from Amazon’s 2022 annual report, which breaks down
the cash flow generated from operations, investing, and financing activities.
Learn how to analyze Amazon’s consolidated statement of cash flows in
CFI’s Amazon Advanced Financial Modeling course.

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Indirect Method Presentation
Earlier we discussed how the cash from operating activities can use either
the direct or indirect method. Most companies report using the indirect
method, although some will use the direct method (see CVS’s 2022 annual
report here).

Remember that the indirect method begins with a measure of profit, and
some companies may have discretion regarding which profit metric to use.
While many companies use net income, others may use operating
profit/EBIT or earnings before tax.

If the starting point profit is above interest and tax in the income statement,
then interest and tax cash flows will need to be deducted if they are to be
treated as operating cash flows. Clearly, the exact starting point for the
reconciliation will determine the exact adjustments made to get down to an
operating cash flow number.