BUSINESS BUSINESS ESSENTIALS

Procurement
By JULIE YOUNG | Reviewed by MARGARET JAMES | Updated Dec 27, 2020

TABLE OF CONTENTS
What Is Procurement? How Procurement Works
Financial Accounting Special Considerations
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What Is Procurement?
Procurement is the act of obtaining goods or services, typically for business purposes.
Procurement is most commonly associated with businesses because companies need to solicit
services or purchase goods, usually on a relatively large scale.

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Procurement generally refers to the final act of purchasing but it can also include the
procurement process overall which can be critically important for companies leading up to their
final purchasing decision. Companies can be on both sides of the procurement process as
buyers or sellers though here we mainly focus on the side of the soliciting company.
 KEY TAKEAWAYS
Procurement is the process of purchasing goods or services and is usually in reference
to business spending.
Business procurement requires preparation, solicitation, and payment processing,
which usually involves several areas of a company.
Procurement expenses can fall into several different categories, depending on the
procurement demand.
Competitive bidding is usually a part of most large scale procurement processes
involving multiple bidders.

How Procurement Works

Procurement and procurement processes can require a substantial portion of a company’s
resources to manage. Procurement budgets typically provide managers with a specific value
they can spend to procure the goods or services they need. The process of procurement is often
a key part of a company's strategy because the ability to purchase certain materials or services
can determine if operations will be profitable.

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In many cases, procurement processes will be dictated by company standards often centralized
by controls from the accounts payable division of accounting. The procurement process
includes the preparation and processing of a demand as well as the end receipt and approval of
payment.

Comprehensively this can involve purchase planning standards specifications determination

Comprehensively, this can involve purchase planning, standards, specifications determination,
supplier research, selection, financing, price negotiation, and inventory control. As such, many
large companies may require support from a few different areas of a company for successful
procurement.

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Chief Procurement Officers

Some companies may even choose to hire a chief procurement officer to lead these efforts. A
chief procurement officer can oversee the establishment of procurement standards, work with
accounts payable to ensure procurement standard integration and efficient payment, and serve
on procurement teams making procurement decisions when there are multiple competitive
bids.

Overall, procurement costs will be integrated into the financial accounting of a business, as
procurement involves acquiring goods and/or services for the revenue goals of the business.

Important: Comprehensively, procurement can involve support from several areas of

a company.

Financial Accounting
Procurement processing can be divided and analyzed from several angles. Companies and
industries will have different ways of managing the procurement of direct and indirect costs.
Goods companies, as compared with services companies, will also have different ways of
managing costs.

Direct vs. Indirect Procurement Costs

Direct spend refers to anything related to the cost of goods sold and production including all
Direct spend refers to anything related to the cost of goods sold and production, including all
items that are part of finished products. For manufacturing companies, this can range from raw
materials to components and parts. For merchandising companies, this will include the cost at
which merchandise is purchased from a wholesaler for sales.

For service-based companies, direct costs will primarily be the hourly labor costs of employees
performing services. Procurement for items pertaining to the cost of goods sold directly affects
a company’s gross profit.

By contrast, indirect procurement involves non-production-related purchases. These are

purchases a company uses to facilitate its operations. Indirect procurement can involve a broad
range of purchases including office supplies, marketing materials, advertising campaigns,
consulting services, and more. Companies will generally have different budgets and processes
for managing direct costs as compared with indirect costs.

Goods vs. Services Procurement Accounting

Procurement is part of the expense process for all types of companies, but goods and services
companies account for revenues and costs differently. As such, accounting for procured goods
will also differ from accounting for procured services.

Companies focused on goods will need to deal with the procurement of those goods as
inventory. These companies place a lot of importance in this area on supply chain management.
Service-based companies provide services as their primary revenue generator so they do not
necessarily rely as heavily on a supply chain for inventory although they may need to purchase
goods for technology-based services.

In general, the cost of sales for many service companies is based on the hourly labor cost of
employees providing the service so procurement as a direct expense is not a major factor.
However, service-based companies will usually have higher relative indirect costs because they
typically deal with their own procurement as an indirect expense through marketing.
Special Considerations
Competitive bidding is a part of most business deals involving multiple bidders. The
competitive bidding process for goods is usually more simplified than for services. Procurement
is also the term used for purchasing goods and services on behalf of the government which has
its own bidding processes and requirements.

Competitive bidding for all types of goods generally involves proposals that detail the per-unit
price, shipping, and delivery terms. Competitive bidding for the procurement of services can be
more complex since it can involve a multitude of things including individuals involved,
technology services, operational procedures, client servicing, training, service fees, and more.

In each case, the solicitor of bids chooses the supplier they want to work with based on both
operational business aspects as well as costs. The solicitor is then responsible for accounting for
expenses depending on the goods or services agreed to. Government agencies and large
companies may choose to solicit procurement proposals on an annual or scheduled basis to
ensure that they continue to maintain the best relationships for their business.

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Related Terms
Competitive Bids: Winning Business Contracts
A competitive bid is most commonly associated with a proposal and price submitted by a vendor or
service provider to a soliciting firm for products or services to win a business contract. more
LEARN MORE
Request for Proposal (RFP)
A request for proposal (RFP) is a project funding announcement posted by a business or organization for
which companies can place bids to complete the project. more

Selling, General & Administrative Expense (SG&A) Definition

Selling, General & Administrative Expense (SG&A) includes all selling-related costs and expenses of
managing a company on its income statement. more

Fixed Cost
A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services
produced or sold. more

Trade Credit
Trade credit is a type of commercial financing in which a customer is allowed to purchase goods or
services and pay the supplier at a later scheduled date. more

Understanding Cost of Goods Sold – COGS

Cost of goods sold (COGS) is defined as the direct costs attributable to the production of the goods sold in
a company. more

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