Spend control is the best practice that every growing company must follow to grow and effectively use capital. However, companies only think about cost control in a tough economy, which is a mistake. But you are not the average CFO or controller; you want to set up the best practices for your company, and we will tell you how to do that.
Spend control is a discipline all companies must follow, but most companies consider it a cost-cutting measure.
Forward-looking CFOs think about Spend management as leverage to effectively manage cash and allocate the capital to the appropriate projects,
But how do you get started?
In this article, we will cover 5 ideas that you can leverage to control spending.
1. Cost control process to manage Spend (ensure that you are prudent about the company’s money)
2. Review Spending to identify savings opportunities (Get the best value for your money).
3. Contract to lock in rates (ensure that you get the negotiated savings)
4. Extend payment terms to manage cashflow (get a one-time benefit to your cash flow)
5. Leverage technology to increase compliance (automated so that you don’t have to monitor the compliance to policy manually)
Spend control is all about managing your company’s expenses smartly and effectively. It’s important to keep an eye on how much money you’re spending and where that money is going, so you can make informed decisions about allocating your resources.
One key aspect of Spend control is creating a budget. Setting spending limits for different areas of your business ensures you’re not overspending in one area and neglecting another. This can help you prioritize your employee expenses and other payables to get the most bang for your buck.
Another important part of Spend control is implementing cost-saving measures. This could involve negotiating with vendors for better prices or finding ways to streamline your operations to reduce waste and inefficiency. Identifying areas where you can cut costs without sacrificing quality can make your business more profitable in the long run.
Overall, your Spend control is crucial to running a successful business. By closely monitoring your expenses and making smart decisions about allocating your resources, you can ensure that your company stays financially healthy and competitive in the marketplace.
Companies that have more than 10 employees and have significant external vendor spend. If most of your Spend is payroll, this strategy is not for you.
Cost control ensures that all spending is reviewed before making a purchase, avoiding manual processes. That means the appropriate person in the company must approve all purchase requests.
Cost control is a cost avoidance strategy. In other words, with the cost control process, you can control what you want to Spend and when.
The first step is implementing a purchasing policy that documents your purchasing process. A purchasing policy should list your purchasing process, when approval is required, and who should approve a purchase.
The above are the 3 core elements of the purchasing policy. There are additional elements to a purchasing policy, like diversity, preferred vendor bidding approach, and so on.
To get started, answer the following 3 questions:
The next step is to set up a process for employees to submit the purchase request for approval. This could be a simple purchase requisition form that the employees need to fill out, or you can send an email. As your volume grows, you want to look at automating the process using a purchasing system.
This process covers how to send a purchase request for approval. For example – you could have a shared inbox for employees to send all purchase requests. If you are a small company, the employees can directly email the identified person for approval.
If you are looking for a completely automated process for cost control, ProcureDesk can fully automate the process for you. Click the button below to schedule a demo with one of our product specialists.
This strategy is for companies that have repeatable spend monthly and are looking to get the best value for their money. Also, this is more applicable to companies purchasing commodity products like office supplies, IT supplies, etc. This strategy does not apply to one-off product purchases but applies to Indirect Spend.
Here is a step-by-step process to identify cost-saving opportunities:
The first step is for your accounts payable team to understand what you are spending so that you can start identifying cost savings opportunities.
If available, the best strategy is to use the last 12 months of Spend. Now the big question is where to get this data from:
If you have line-level information, conduct spend analysis to group the spending into different buckets. For example, you can categorize your spending into different buckets as follows:
Office Supplies – $ 50,000
IT Hardware And supplies – $100,000
Software Subscriptions – $50,000
Consulting Services – $100,000
Once you have done this categorization, the next step is identifying the common vendors.
In this step, you identify the vendor spend for each category.
For example, for office supplies – you are purchasing it from 3 different vendors Amazon, Staples, and Office Depot.
The big question is, do you really need 3 vendors for office supplies?
The short answer is no.
Some of your employees might tell you that a certain item is cheaper with one vendor or another, but that is not the point. You are trying to consolidate the vendors to get a better volume discount.
You should always look at the aggregate cost savings on the total spend, not the individual line items, unless you spend millions of $ on purchasing paper.
Before negotiating a better cost with a vendor, it is time to standardize the items you purchase from vendors. For example – you might be purchasing different types of printing paper, but by standardizing it to one size and type, you can optimize the cost through volume discounts.
If an organization has multiple locations, it is not uncommon to see that different locations have preferences for different versions of the same product.
This step should be easy if you have a centralized purchasing policy. If not, read this article on how to setup a centralized purchasing process.
You now have a list of your top vendors, what you purchase from them, and high-level opportunities to reduce costs.
Now it is time to work with the vendors to reduce the cost.
The standard approach here is to consolidate vendors to reduce Spend.
The idea behind standardization is that it allows you to consolidate the volume to a limited set of vendors and get better pricing for higher volumes.
Since you have done the standardization of items, you will have a limited set of items to work with. You can get more bang for your buck by consolidating the vendors.
For example – if you have 3 vendors for office supplies, you can negotiate better discounts by consolidating the purchase to one vendor.
This strategy is for companies negotiating purchase rates and wanting to lock in rates. This strategy also helps with ensuring that you are achieving the negotiated savings.
Low to Medium
There are two steps in the contract negotiation process:
As mentioned above, you need to consolidate the vendors to reduce spending. So if you have already negotiated the pricing, it is time to agree to terms for doing business.
The terms might include one or all of the following:
Once you have negotiated the terms, it is time to formalize the agreement by signing it.
The steps include the following:
This strategy is for companies with at least $1-5M of annual spend, and the top 20% of vendors contribute to 80% of the Spend. It is also helpful if your business has a good credit rating.
By leveraging this strategy, you can save on the capital expenditures cost if you borrow money to pay the vendors.
Medium to Hard
Here’s a step-by-step process for extending payment terms:
1. Review current payment terms: The first step is to review the current payment terms with suppliers. Identify which suppliers have shorter payment terms and which have longer ones. Thus, also helping you get better supplier management.
You can download the vendor Spend report from your accounting system. If you have a purchasing system, you can easily find this information. Following is an example of payment term analysis.:
2. Evaluate the impact of extended payment terms: Evaluate the impact of extended payment terms on the business. Determine how much cash flow will be freed up and how it can support business operations, reducing financial risk.
3. Identify the suppliers to target: Identify the suppliers that can be approached to extend their payment terms. Prioritize suppliers based on the impact on cash flow and the strength of the supplier relationship. The longer the existing relationship with the vendor, the easier it is to negotiate the term extension.
4. Initiate discussions with suppliers: Initiate discussions with suppliers to request extended payment terms. Explain the reason for the request and the benefits to the supplier. For example, you can commit more volume if they are willing to offer better terms and prices.
5. Confirm payment terms in writing: Once an agreement is reached, confirm the payment terms in writing.
6. Update accounting systems: Update accounting systems to reflect the new payment terms that will reflect in your financial statements. This will ensure that payments are made on time and that cash flow is managed effectively. You might need to update the existing vendor invoices to update the payment terms.
Extending payment terms can help with better cash flow management but requires careful planning and execution. By following these steps, businesses can extend payment terms without damaging their relationships with suppliers or negatively impacting their cash flow.
This strategy is for companies that want to use technology to automate the process of cost savings.
By leveraging this strategy, you can ensure that all the negotiated savings are realized, and you don’t have to babysit the purchasing process manually. Thus, making things more efficient for your finance department!
The goal of implementing procurement technology is to increase compliance with defined policies in real time. An automated purchasing process can help you with the following:
Here is how to automate this using purchasing automation technology:
Automating the approval workflow is a great way to make purchasing processes faster and more efficient. Automated approval workflow saves time, reduce human error, and enables management to make better purchasing decisions.
So, how do you do it? Well, first off, you need to define the approval workflow. This means figuring out who needs to approve what and when. Once you’ve got that down, it’s time to configure the purchasing system to match that workflow. This can involve setting up automatic notifications for the right people when approvals are needed.
Next, you need to establish some approval rules. For example, you might want to set a minimum amount for purchases that require approval. Then, you can use the purchasing system to automate the approval process. The system can automatically route requests for approval to the right decision-makers, who can then approve or deny requests from within the system.
Monitoring the approval workflow to identify bottlenecks or delays is important. This way, you can improve the system and further streamline the process.
Don’t overcomplicate the approval workflow process. The minimum viable dose is to set up at least one approval for purchases over $250. You could set up a higher limit if you want more control.
Here is an example of approval workflow in ProcureDesk:
In the previous sections, we discussed negotiating contracts for better cost savings. But how do you ensure that you realize those savings?
Catalogs provide an easy mechanism to ensure employees purchase from their preferred vendors.
There are two main ways to set up catalogs for purchasing.
Punchouts enable employees to access a supplier’s catalog from within the purchasing system, like ProcureDesk, as if it were part of their system.
Employees can log into the purchasing system and click on a link to access the supplier’s catalog. This link is known as a punchout link. Clicking on the link takes the employee to the supplier’s website, where they can browse the supplier’s catalog and select the items they wish to purchase.
Once the employee has selected the items they want to purchase, they add them to their cart on the supplier’s website. Then, when they check out, the punchout catalog sends the cart data back to the procurement system and procurement process. The procurement system then generates a purchase order based on the items in the cart and the supplier’s pricing, and other terms.
Here is an example of a punchout catalog in ProcureDesk:
If a supplier doesn’t have a website, you can create an internal catalog for purchase.
Employees who need to purchase can conveniently browse the internal catalog to find the product or service. The internal catalog typically contains a detailed description of the product or service, pricing information, and other relevant details, such as delivery timelines or specifications.
Once the employee has selected the item they need, they can add it to their cart and submit the order through the procurement management system. After that, the procurement system generates a purchase order, which is then forwarded to the supplier for fulfillment. A big win for your procurement team!
The major advantage of internal catalogs is that they can be customized to cater to the company’s specific needs. For instance, the company can create a catalog that only lists products or services from preferred suppliers or meets certain sustainability or diversity standards.
Another benefit of using internal catalogs is that they aid in cost control and compliance. By restricting purchase options to a pre-approved catalog, the company can better manage its expenses and ensure that employees purchase only those items that meet company standards.
Here is an example of an internal catalog in ProcureDesk:
Managing financial resources effectively is a key responsibility for any organization. Budget control in a purchasing system is essential to achieve this objective. It involves setting a budget limit for a specific purchasing department or category and managing expenses against it.
The first step towards implementing budget control is establishing a budget for the concerned department or category. This can be done by analyzing historical spending patterns and estimating future needs. After defining the budget, it must be communicated to the relevant stakeholders to ensure compliance.
A mechanism must be established to track and manage expenses against the budget. Setting up alerts or notifications is an effective way to do this. Alerts can be triggered when a purchase exceeds a predetermined budget threshold, and relevant stakeholders can be notified to take necessary action.
Implementing approval workflows is another approach to budget control in a purchasing system. This involves establishing an approval process for all purchase requests exceeding a particular budget limit. This ensures that the relevant stakeholders review and approve all purchases before processing, preventing unnecessary overspending.
Here is an example of budget control in ProcureDesk:
Spend reporting helps to improve compliance and accountability. It enables senior management to monitor spending against budgets, contracts, and other financial controls, ensuring that expenses are aligned with company policies and procedures, such as your employee expense reports and other payables.
In addition to controlling Spend, spend reporting can also offer organizations valuable insights into the performance of their suppliers and a way to analyze allowable expenses and other company expenses better. By monitoring the Spend with various suppliers, organizations can identify the ones that offer the best value for money.
The information gathered through spending reporting can help organizations make informed decisions about supplier relationships. It can be used to negotiate better terms and pricing with existing suppliers, leading to cost savings. Alternatively, organizations can switch to new suppliers offering better value for money, leading to even more significant savings and better expense management, no matter your business’s expense type.
Here is an example of a Spend dashboard:
The Spend dashboard gives you a quick snapshot of overall Spend. You can see where the company is spending money, with whom, and who is spending.
You can also see monthly Spend trends so that you can understand the key purchasing trends, making it easier to impose limits for expenses:
A common ask from management is to understand what are the total obligations.
An open-order report can easily provide that information; here is an example of an open-order report:
You can see all your open obligations, what has been invoiced, and what is pending to be invoiced.
You can also see other information, like invoices that have been received but the vendor has not delivered the product.
Here are some questions about Spend control.
Controlling spending is a critical aspect of managing an organization’s finances. It involves your finance teams setting budgets, monitoring expenses, and ensuring all purchases align with the company’s financial goals and priorities.
Controlling spending helps to improve financial stability and avoid any uncontrolled spending. Organizations can maintain a healthy cash flow and avoid financial challenges such as debt or bankruptcy by managing expenses and ensuring that all purchases are within budget.
It also helps optimize resource allocation and gives your team visibility into spending. By limiting spending to essential products or services, organizations can prioritize their resources towards investments that generate the most value and return on investment.
Thirdly, controlling spending helps to promote accountability and compliance through spending policies encouraging discretionary spending. By establishing clear policies and procedures around spending, organizations can ensure that all employees are aware of their responsibilities and adhere to company standards accepted for organizational spending. This also reduces the risk of fraud or misuse of company funds.
Tail spend control refers to managing the purchasing of low-value items that account for a relatively small percentage of an organization’s overall spending, helping with business growth. Generally, organization spending follows the 80-20 rule; 80% of the purchase is with the top 20% of the vendors, and the remaining 20% is with the remaining 80%. This is often referred to as a long tail for spend.
The following are the steps involved in implementing tail spend control:
Identify tail spend categories: Identify categories of items that account for a small portion of spending but are still necessary for business operations.
Collect spend data: Gather data on spending within these categories to understand the extent of tail Spending and identify areas of opportunity for savings.
Consolidate suppliers: Consolidate suppliers for tail spend categories to streamline purchasing processes and achieve cost savings through volume discounts.
Establish preferred suppliers: Establish preferred suppliers for tail spend categories to ensure consistent quality and service levels while negotiating better pricing and payment terms.
Implement automated processes: Implement automated processes for purchasing and payment to reduce administrative overheads and errors and increase efficiency.
Monitor and measure results: Monitor and measure results to ensure that tail Spend control initiatives are effective and adjust as needed to improve savings and operational efficiency.
Spend control software is a type of software that businesses can use to manage their spending more effectively. It’s also known as spend management or procurement software your organization can use as a form of business intelligence.
With spend control software, companies get access to various tools and functionalities that make it easier to manage procurement processes. The software helps automate and streamline purchasing activities, track expenses, and monitor supplier performance improving your spend management solutions.
By using spend control software, businesses can gain better visibility into their spending patterns and identify areas where they can reduce costs. They can also use the software to set budgets and forecast their spending, giving them a better understanding of their financial situation and supporting business resilience.
The key features of Spend control software are as follows:
1. Purchase order management
2. Budget management
3. Contract management
4. Spend reporting and trend analysis
5. Budgeting and forecasting
Indirect Spend refers to the money that a company spends on things that are not directly related to making their products or services. It includes all the expenses necessary to keep the company running, but they don’t contribute directly to the production process.
For instance, if a company sells software, the cost of the computers, software, and other digital tools its employees use to develop that software would be direct spend. However, indirect spending would be the cost of office supplies, travel, advertising, marketing campaigns, legal and consulting services, and other expenses that support the company’s operations.
To control Indirect Spend, you need to do the following:
The first step, obviously, is to identify the Indirect spending so that you know how much you are spending and where the opportunities are.
Using a purchasing system like ProcureDesk, You can export the past 12 months of Spending history to identify your total spending.
In this step, you must identify cost savings and control opportunities. Cost control avoids unnecessary spending, while cost savings focus on getting the best value for the items you need to purchase.
If you have identified any cost savings opportunities in the last section, this is the time to execute those. For example – If you have identified that you are purchasing office supplies from three different vendors, you can use this opportunity to consolidate your vendor relationship.
The last step in controlling indirect Spend is implementing a cost-control process. You can set up a purchase approval process to control Spending so that unnecessary expenses can be avoided. Leveraging this strategy can easily achieve 2-3% of cost avoidance.
Controlling spending is super important for businesses because it affects how much money they make and how successful they are in the long run. Basically, when a business can control its spending, it can make more money and use that money to grow and develop.
Controlling spending helps businesses manage their cash flow, like the money that comes in and goes out of a business. By keeping track of expenses and prioritizing spending, businesses can avoid running out of money or not having enough money to pay their bills.
It also helps businesses be more stable financially, which means they’re better able to handle problems like unexpected expenses or changes in the market.
When businesses control their spending, they can make better decisions because they know how much things cost and can figure out how to use their resources more effectively. Plus, they can keep their prices competitive and stay ahead by investing in new products and services.
So, there you have it – controlling spending is really important for businesses because it helps them make more money, be more financially stable, and make better decisions.
Controllable spending refers to expenses a business or individual controls and can adjust or reduce as needed. Examples of controllable spending include:
Spend under management refers to the total Spend managed by a strategic sourcing team.
Spend under management refers to the amount of a company’s spending that is actively managed by procurement department professionals or other designated personnel. Companies typically compare their total Spend to the amount of spend under centralized control, and expense reports analysis. This includes Spend managed through contracts, purchase orders, procurement cards, or other procurement methods.
Spend under management helps companies measure how effectively they’re managing their spending. By increasing the amount of Spend under management, companies can improve their procurement processes, reduce costs, and get more value from their suppliers. So, it’s an important metric that companies use to evaluate their procurement performance and identify areas for improvement.
Spend under management varies from company to company and industry too. For example, a manufacturing company will spend more under management because they spend a lot on raw materials. On the other hand, a software company might have less Spend under management and financial planning efforts.
Here are some typical benchmarks for spending under management:
Spend control is essential in any economy, and businesses should strive to have as much of their Spend under management as possible. This helps them ensure they get the most value from their suppliers, reduce costs, and make better decisions that can put them ahead of the competition. To achieve this goal, companies must implement manual processes, maximize accounts payable operations and supplier relationships, adopt
If you need more support to understand your company’s spend control, contact ProcureDesk today!