What is Financial Savings Management?- Definition
Financial savings management refers to the process of estimating savings based on factors such as tracking savings, planning well, and mapping the same. Thus, this helps organizations in controlling spends and achieving savings by having a clear picture of accounts and planning their strategies accordingly.
Financial savings management in procurement includes all activities that involve estimating savings based on strategic sourcing plans, projecting savings to the budget, and tracking realized savings. In addition, financial savings management gives you a clear picture of function-specific savings projects and the money you’ve saved.
How to measure the value of procurement savings?
Procurement’s primary purpose is to ensure that products and services are purchased at the best possible price. The number one performance metric for CPOs is still cost savings. Hard savings or so-called cost avoidance can be used to quantify this. The dispute between procurement and finance about valuing procurement savings is still going on. There is no such thing as a correct or wrong approach. Procurement must establish a trust to gain credibility, transparency, and alignment with finance and demonstrate its value to business stakeholders.
Procurement prefers to define cost savings as the difference between the initial cost paid and the new negotiated cost. Savings could be determined from the first offer received or market benchmarks in the absence of a previous cost reference. Procurement would prefer to record savings during the negotiation process or upon confirmation of a signed contract when they can sit back, relax, and pass over the agreement to the business for execution. However, this does not translate into actual monetary savings; it merely informs us of the savings potential.
Where to find the opportunities for cost savings?
The key to wise procurement is focusing resources on programs that generate the most value and identifying cost-cutting opportunities. Spend analysis identifies opportunities for future savings. The following data for any specific commodity or service may provide insights into where savings may be found:
- Annual expenditure
- Total number of suppliers
- Spending on each supplier
- Expenditure per division
- Comparison with selected benchmark
Spend consolidation, leveraging discounts, and lowering the number of suppliers are all ways to cut costs. The cost-effectiveness of a product or service can also be increased by re-specification. Working with your primary suppliers in a transparent and collaborative manner, where both sides gain from cost reductions and advantages can be shared, is one area of opportunity that is relatively easy and sometimes ignored.
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