Purchasing and Financing 2024

PART A. PURCHASING MANAGEMENT
1. THE IMPORTANCE OF THE PURCHASING DEPARTMENT
Students must be able to describe the objectives of the purchasing department.
A purchasing decision starts with the recognition of a need. Once a need is recognised it
must be accurately described so that the correct item can be bought the first time. It’s a
waist of money to buy unneeded items or to buy the wrong item, because it was badly
described.
Supplies must be well managed by the purchasing department so that, when needed,
supplies of the right quality are readily available in the right quantity. The four key
performance indicators are:
o Quality (Supplies must be good enough to be used for their purpose)
o Quantity (Enough of an item must be available)
o Availability (Supplies must be available when needed)
o Accessibility (It must be easy to take delivery of the supplies)
If the key performance indicators are in place, then the user departments will be happy
with the purchasing department, but cost will always be of concern for senior
management and so the Purchasing Manager will always have to keep an eye on cost,
whiles not compromising on the four key performance indicators.
2. THE LEVERAGE EFFECT OF PURCHASING
Students must be able to illustrate the leverage effect of purchasing by calculating the
increase in profit percentage caused by a reduction in the purchase price of the article.
EXAMPLE:
An item is bought for R1 500-00 and sold for R2 000-00 rand while the operating cost
amounts to R300-00. What will the effect be on the % increase in Net Profit if the
Purchasing manager can?
o A: Reduce the purchasing costs by 2.5 %
o B: Reduce the purchasing costs by 5 %
o C: Reduce the purchasing costs by 10 %
Remember that: Gross Profit = Sales Income – Cost of Sales
Net Profit = Gross Profit – Operating Cost
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