Buying goods and services without a formal plan is a hidden tax on SME margins.
Many founders handle procurement through informal agreements or urgent, ad-hoc purchases. This approach often leads to overpayment, inconsistent quality and financial leakage.
A procurement policy is a set of internal rules that governs how your business spends money to acquire assets and supplies.
For a small team, this is not about creating bureaucracy. It is about protecting cash flow and ensuring every naira spent contributes to growth.
Establishing spending thresholds
The first step is deciding who has the authority to spend and how much they can commit without higher approval.
Without thresholds, a junior staff member might commit the business to a high-cost contract that the founder cannot afford to fund.
Create a simple tiered structure. For example, a manager might approve purchases up to N50,000, while anything above N200,000 requires the founder’s signature.
These limits prevent unplanned cash outflows and force a pause to consider if the purchase is necessary for current operations.
Standardising vendor selection
Relying on a single trusted supplier is a common SME mistake. While convenient, it creates a dangerous dependency and removes the incentive for the supplier to stay competitive on price.
A formal policy should mandate a competitive bidding process for significant purchases.
Implement a “three-quote rule” for any item above a certain value. This requires the team to obtain pricing and terms from three different vendors before selecting one.
Price should not be the only metric. Your policy should weigh reliability, delivery speed and after-sales support.
For example, a Nigerian logistics firm may find a cheaper courier, but if that courier has a higher rate of damaged goods, the lower cost actually reduces the overall margin through replacements and customer refunds.
Managing cash flow and payment terms
Procurement policies must align with the company’s cash position.
Many SMEs fall into the trap of paying 100 percent upfront for goods that have not been delivered. This ties up working capital and increases the risk of loss if the vendor fails to perform.
Define standard payment terms in your policy. This could be a 30 percent deposit upon order and 70 percent upon verified delivery.
Negotiating longer payment terms, such as Net-30 or Net-60, allows you to sell the product or service before you have to pay the supplier.
This shift effectively uses supplier credit as a zero-interest loan to fund growth.
Avoiding common procurement traps
Avoid the temptation to ignore the policy for “urgent” needs. Urgency is often where the most expensive mistakes happen.
Another risk is the failure to document approvals. When disputes arise over budgets or quality, a lack of a paper trail makes it impossible to hold staff or vendors accountable.
Require a simple purchase order or a signed internal request form for every transaction over your lowest threshold.
Review your vendor list every six months to ensure they still provide the best value for the business.
Action for SME owners: List your top five recurring expenses and check if you have had a second or third quote for them in the last 90 days. If not, start a competitive review this week.
