Effective spend management is the key to a sustainable business.
Yet a lot of companies prioritize business expansion over spend control. In order to effectively manage spend, businesses must establish distinct procurement processes and policies. Spend management is not about just spend control, but spend effectiveness.
We need to focus on understanding the value we can gain from each purchase and optimize our procurement spend. This article will discuss the basics of spend management and how successful companies are effectively managing their spend without impacting operational efficiency.
Spend control aka spend management refers to the strategies, procedures, and tools companies leverage to oversee and control procurement spend. Through strategic spend management, businesses can cut-down unwanted spend, enhance operational efficiency, and allocate more budgets towards initiatives that drive business expansion and provide value to the business. Spend control is essential for all companies because it has a direct effect on profitability.
When you have control over your spend, you'll have clear visibility of all your purchasing activities. It includes but not limited to expenses like raw materials, travel, and office supplies, in addition to fixed expenses such as payroll and rent.
Managing your spend will improve cash flow and make smart spend decisions. It gives complete visibility into your companies spend pattern and effectiveness.
Cost savings: Understanding the spend pattern makes it easier to optimize your spend. Having spend visibility gives you the power to negotiate better terms, and consolidate supplier base.
Improved cashflow: With managed spend, you can have better control over your budget and payment terms. It enables you to maintain a higher amount of cash reserves and use it for strategic initiatives.
Better Financial Forecasting: Detailed insight into spend allows for precise budget planning and prediction. Understanding your spend patterns makes it simpler to see the impact of expenses on overall business performance.
So, how does out of control spend affects organization? While organizations may be able to function in the short terms but unmanaged spend can cause huge financial loss.
Maverick spending occurs when employees make purchases that do not align with the company's spending policies, like buying supplies from vendors that are not authorized. This results in various adverse impacts. Included in this group: a lack of ability to utilize discounted rates and disagreements with suppliers who have exclusive agreements. Reckless spending can lead to the dangerous consequence of being linked to a supplier with undisclosed reputation problems.
According to this report, 85% of employees fabricate some part of their expense claim. Most of these instances might not be deliberate. Maybe the employee just couldn't remember the exact amount spent and made an estimate. Yet, this might cause a huge financial lose to the company.
In addition, when the card is exposed online, the risk of credit card fraud significantly increases. Credit fraud is a billion-dollar industry in the US and UK. However, many businesses continue to use their cards without considering the potential risks.
Not having visibility into spend means, having a budget is meaningless. Lack of spend approvals will allow stakeholders make purchases as they see fit in order to accomplish tasks. This way of making spend decisions disregards the budget, possible cost reductions, existing contracts, and overall cost. An effective budget relies on precise expenditure information from prior quarters.
Implementing a spend management software is the most effective way to control spend. But following these best practices can help simplify the implementation of spend controls and enhance the procurement process.
Implementing a coherent procurement policy is as important as using technology. The policy should educate employees and stakeholders on spend limits, the category of items they can purchase, and budget approval flows.
Having complete visibility into spend is essential for making strategic spending choices. Gathering and categorizing spend data allows for spend analysis. Through spend analysis examine how money is being spent and the patterns in order to make decisions based on the data, such as:
Manual processes can hinder or even prevent the ability of growing organizations to control their spending effectively. Business costs increase as the company expands. It is a continuously shifting target to maintain, organize, verify, and update spend data.
Technology helps you to overcome these challenges, enabiling cost savings and budget control. Automating manual purchasing processes helps businesses cut costs, eliminate errors, and enhance efficiency.
Spend management is crucial for companies of all sizes. There is a risk of reduced profitability and higher financial burdens if it fails to properly manage expenses. Effective spending control policies and systems help companies to streamling their spend, and improve spend visibility and effectiveness.