by martieLast Updated : Oct-11-2023
Effective Business Spend management and strategic sourcing can save you up to 10% on your annual Spend. Please don’t take my word for it; this results from The Hackett Group study. If you are a CFO of a growing company and worried about business spend management, we’ve got you covered.
This article will tell you everything you want to know about spend management, including the importance of a comprehensive expense policy. Specifically, we will address the following:
Let’s get started!
Business spend management (BSM) is the comprehensive management approach to monitoring, controlling, and optimizing the business expenses of your entire company.
Imagine having your Spend data at your fingertips so that you can easily see where you are spending money, who is spending that money, and what opportunities exist for cost savings,
BSM’s core encompasses procurement, expenses, supplier management, and supplier payments, aiming to provide real-time visibility and control over every dollar spent. For CFOs and controllers, BSM is crucial as it directly impacts the bottom line.
Implementing effective BSM practices ensures that spending aligns with company objectives, reduces inefficiencies, and safeguards against potential risks. A robust BSM strategy is vital in industries like Biotech, professional services, and construction, where costs can vary widely and quickly become complex. It’s about making every penny count and ensuring financial agility for sustainable growth.
Here are the key benefits of implementing a comprehensive management strategy on spending:
Business spend management (BSM) leads directly to significant cost reductions. By offering clarity into spending habits and enabling detailed scrutiny of supplier contracts, BSM allows companies to pinpoint and eliminate areas of overspending. Industry analysts have noted that implementing BSM strategies often results in 5-10% cost savings within the first year.
BSM optimizes operational efficiency by streamlining processes. By automating routine tasks and shortening approval times, companies experience a noticeable boost in overall productivity. This means resources are freed from administrative burdens, enabling them to concentrate more on value-added activities. Imagine your key resources focusing on revenue-generating or research activities rather than creating and tracking purchase order requests.
Effective BSM ensures that all expenditures align with internal company policies and external regulatory standards. As a result, maverick spending or violations of procurement policies drop significantly. This tightens internal controls and minimizes risks associated with non-compliant activities. This ensures you purchase from your preferred vendors at a preferential rate that saves you money.
This section will detail a step-by-step process to get started with business spend management.
Defining clear objectives is foundational to any successful business spend management (BSM) initiative. Without a set direction, efforts can become fragmented, leading to subpar results.
Consider a company that targets a specific goal, like reducing costs. If their aim is a 5% Year-On-Year (YOY) reduction for the subsequent three years, their BSM strategy would emphasize cost-cutting mechanisms, renegotiating with suppliers, and streamlining procurement processes to meet this precise metric.
On the other hand, a different organization might prioritize transparency in their spending. In such a case, their BSM objectives would focus on creating clearer real-time visibility on spend across all departments. By doing so, accountability can be better distributed among stakeholders, ensuring that each division or financial officers along with their team understands their spending behavior and its impact on the company’s overall financial health.
Thus, whether it’s cost reduction, transparency, or another goal, setting clear objectives ensures that all BSM efforts are cohesive and driving towards a unified target.
The next step is to conduct a spend analysis exercise to understand your total spending. Don’t worry about the cost savings opportunities yet; that would be the next step.
You must aggregate your Spend data irrespective of the source and how you have paid your vendors.This will help you improve supplier relationships.
The more granular the data, the better it is. For example – you can run a report from your accounting system on Spend by GL, but that doesn’t tell you specific items purchased. This is to ensure you gain the supplier insights and the community insights that you may need to understand.
Here are the steps:
Once you have the category structure, categorize your expenses into these categories. This could be a time-consuming effort if you have a lot of data.
Use the Pareto principle to reduce the effort for classification. Only focus on the top 20% of items contributing to 80% of Spend. Then, focus on the remaining 80% if you have time. Otherwise, start with what you have.
There are many ways to identify cost-saving opportunities. Here are the top three that you can use today.
Companies can achieve economies of scale by grouping Spend with a limited number of suppliers, leading to more favorable pricing and terms. It simplifies the procurement process, reduces administrative overhead, and offers better negotiation leverage.
For example, a biotech firm can consolidate these purchases with one or fewer suppliers instead of procuring laboratory equipment, reagents, or chemicals from multiple vendors. For instance, the firm can choose one major supplier instead of buying various chemicals from different suppliers, leading to bulk purchasing discounts and reduced administrative and logistics costs.
Renegotiating payment terms can lead to improved cash flow. By extending payment deadlines or securing early payment discounts, companies can retain cash for longer periods, helping with liquidity or reducing the overall amount owed.
Example: A professional services firm that typically pays its software licensing fees within 30 days might renegotiate terms to a 45-day payment period. This extra 15 days provides additional financial flexibility, allowing the firm to manage short-term cash needs better or invest in other immediate opportunities.
Standardizing items across departments or even company-wide can lead to bulk purchasing and reduced complexities in procurement. This not only ensures consistency in quality but also simplifies inventory management.
For example – A roofing company might want to standardize specific shingles, underlayment, or other materials to ensure teams are familiar with installation procedures and reduce training needs. It can lead to better bulk purchasing agreements with suppliers.
Once you have assessed and prioritized the opportunities, the next step is to get buying from procurement stakeholders.
Procurement stakeholders are generally finance teams, finance managers, operation leads, and so on. Here are three strategies you can use here:
The next step is to define milestones for your Spend management strategy to get a consensus on the goals that must be achieved in a certain timeframe.
Here is how to do this effectively:
Allocate specific tasks to dedicated team members or departments. For example, while procurement handles vendor relationships, finance should be tasked with managing payment schedules.
Spell out the duties of each stakeholder. As an illustration, a procurement officer might be responsible for supplier vetting. In contrast, a project lead overseeing departmental budgets ensures campaign budgets in a marketing team are approved by a set deadline.
Stakeholders should give consistent updates on their areas, like how a small enterprise member tracks and reports office supply costs monthly, promoting ongoing oversight.
Assign clear start and end dates for tasks. For instance, when transitioning to a new supplier, set a definitive completion date to ensure smooth core business operations.
Schedule regular intervals, like quarterly checks by a construction firm on equipment and material expenses, to maintain budget adherence and evaluate Spend management.
After major tasks or during review periods, allocate time for feedback, refining the process based on hands-on experiences.
Here are some additional resources that help you in this exercise.
All the manual methods might seem daunting and challenging. So, in this section, we will talk about how to use Spend Management Software to automate some of the tasks for controlling costs in an organization. We will use ProcureDesk, your potential innovation partner as an example, but you can use any spend management software to help achieve these goals.
Often, businesses are caught off-guard with unauthorized spending because they don’t have a purchase pre-approval process.
Instituting an automated purchase approval workflow does the heavy lifting to ensure that every purchase is pre-approved based on a set standard, eliminating ad-hoc approvals and reducing compliance risks.
Purchase approvals in ProcureDesk allow companies to implement an automated workflow. This means the system guides the user based on preset conditions once set, eliminating the chaotic and compliance-risky method where employees choose the approver for each purchase request.
Begin by setting up approval limits for various approval tiers, aligning with your established purchasing policy. This can be swiftly configured in ProcureDesk under the ‘Approval_hierarchy’ section. This helps improve your purchasing efficiency.
You can establish a single- or multi-tiered approval process depending on your company’s needs and core competencies. To illustrate, an ‘Approval_workflow’ could look like this:
The first in line for approval in your business process is the requester’s immediate manager.
If the purchase value surpasses $50,000, it’s then escalated to the CFO.
Post the CFO’s nod, if required, it may further go up to the CEO for the final say.
Owing to the predefined approval matrix in ProcureDesk, the system can automatically recognize and notify the relevant approvers based on the transaction value.
As an employee files a purchase request, ProcureDesk sends an automated email to the next-in-line approver. This seamless quick notification ensures swift actions.
Approvers benefit from flexibility. They can approve directly through the ProcureDesk web application, via the quick notification email, or even on-the-go using the dedicated mobile app, optimizing the process for remote and on-site employees. Here is an example of mobile approvals:
Mobile app for approvals
When employees need to purchase items in the middle of the business process, manual item descriptions and unclear processes can cause delays and inaccuracies.
As part of your business strategy, punchout catalogs can streamline the purchasing experience, allowing employees to select items directly from vendor catalogs, ensuring accurate descriptions and specifications.
Employees can either pick items from integrated catalogs or provide a descriptive request. This flexibility accelerates purchasing, ensuring employees spend minimal time on requisitioning.
Catalogs, especially punchout catalogs, transform the procurement procedure akin to online shopping. It’s intuitive, user-friendly, and efficient.
ProcureDesk boasts native integration with over 150 vendors. So, while employees enjoy an online shopping-like experience, the finance team retains control over spending.
Consider the user journey when browsing a vendor like Amazon.com. In the ‘amazon_purchase_requisition’ step, users can seamlessly add desired items to their cart.
After selecting items, users click “Submit these items for Approval.” This action prompts ProcureDesk to fetch the cart data from Amazon, streamlining data entry and reducing human errors. A visual representation of this can be seen in the
One of ProcureDesk’s standout key features is its ability to auto-assign cost center codes and chart of accounts payable based on preset rules. This eradicates the need for employees to sift through financial codes, ensuring swift, entry error-free requisitions.
Companies often overshoot their budgets without an effective mechanism to track and control spending, leading to potential financial challenges.
A robust budget management tool can monitor expenditures, ensuring employees adhere to allocated budgets while maintaining company efficiency.
At its core, ProcureDesk offers a versatile budget structure tailored to diverse company needs. So, you’re in good hands whether your budgeting strategy revolves around General Ledger (GL) allocations based on location or is more project-specific. For instance, you can easily set up standard budgets around GL, location, or departments. Here is how this works in the system:
Budget setupOur project-based setup becomes immensely valuable for industries, say marketing agencies or construction firms, where business unit expenses align with specific projects.
But how does this integrate with daily operations and business expenditures?
Imagine an employee crafting a purchase order request. As they draft, ProcureDesk gently nudges them to align the order with an available budget, providing a real-time budget check. This ensures they’re always aware of their spending scope, reducing potential overruns. From an approver’s standpoint, this system is a blessing. The Approver view of the budgets allows them to understand the financial implications of each purchase request instantly.
Here is the budget view from an approver standpoint:
Approver view of the budgetsBy defining a budget tolerance, say 10% on a $5,000 budget, there’s a cushion allowing expenses up to $5,500.
Traditional procurement and expense systems might only offer high-level overviews, making it difficult for companies to dissect individual transactions down to each line item.
This lack of granularity can hide inefficiencies, prevent bulk-buying opportunities, and even mask potential fraud.
Instead of having real-time updates, companies rely on monthly or quarterly reports to understand their expenditure.
Here is how ProcureDesk helps solve this problem:
Gain immediate clarity on your company’s spending activities with the Spend management dashboard. It displays real-time and committed Spend and pinpoints where and who is responsible for the expenses.
Here is what you get:
With 40+ pre-configured reports, delve deeper into specific areas. For instance:
Open Order Report helps you to view active commitments, invoiced amounts, and pending invoices, aiding in cash flow planning.
Accrual-specific reports help ensure timely book closures by highlighting expenses awaiting invoices.
In today’s digital business ecosystem, the purchasing efficiency and accuracy of data transfer are paramount. This is why reporting accuracy in important. Without an integrated spend management system, there’s a redundant and tedious task ahead: recreating the same transaction in your accounting system. This consumes valuable time and increases the risk of manual errors due to manual processes.
Enter the advantage of integrated spend management software. When you implement an integrated solution like ProcureDesk, the software automatically syncs transaction data with your accounting system. This eliminates the need to duplicate efforts and re-enter data.
The system is designed to import master data, encompassing vital details like cost codes, charts of accounts payable, and department codes. This ensures that your financial data is aligned, consistent, and up-to-date across platforms.
For businesses with diverse operational platforms, ProcureDesk offers an added advantage. It seamlessly integrates with a range of leading accounting systems, including:
A prominent biotech entity on a growth trajectory encountered challenges with its traditional accounting systems, which increasingly seemed outdated for the growth of its purchasing efficiency.
The primary hurdles included time-consuming manual processes, lack of Spend transparency, and fragmented financial data.
After a thorough vetting process, the biotech firm integrated ProcureDesk, targeting its challenges with its suite of crucial features.
Managing your business spending is like juggling: you must keep an eye on multiple balls in the air while ensuring none drop. This includes your customer relationship management, human capital management, and even your company spending (which includes spending policies.)
Getting a clear picture of where the company money is going and ensuring it’s spent wisely isn’t just smart—it’s essential.
But trying to do this all manually? Well, that’s like juggling in the dark. That’s where procurement software solutions, like ProcureDesk, come to the rescue as your innovation partner.
They shine a light on the whole process, ensuring everything’s on track and simplifying the complexities. So, while it’s a no-brainer that keeping a close eye on expenses is crucial, having a tool in your corner that makes the job ten times easier is the real game-changer. Consider it a blend of old-school wisdom and new-age tech.
What you should do now
Whenever you’re ready… here are 4 ways we can help you scale your purchasing and Accounts payable process.