When it comes to managing company expenses, it may be tempting to over optimize the way your company spends money. But doing so can actually cut into your revenue by making it more difficult for your teams to do their jobs and maintain daily operations.
While low costs certainly are a positive in business-grade procurement, it’s time we start looking at what value we can get out of our budgets. From major transactions with suppliers to small travel costs on employee credit cards, spend control takes a holistic approach to managing costs.
This article will cover the fundamentals of spend control and what successful organizations are doing to take control of their finances without hurting the productivity of their operations. We’ll end on some tools and solutions that can help you on your journey towards better spend control.
Table of Contents
What Is Spend Control?
Spend control is the business process of monitoring and managing purchasing across the organization in order to maximize operational efficiency and reduce unnecessary spending.
As the common saying goes, you have to spend money to make money. So exactly what is spend? All expenses, whether internal or external, fall into the category of company spend. Companies naturally have to spend to boost their own revenue, and spend control is the practice of monitoring and managing the money flowing out of the company as a result of daily operations.
Accounts payable teams need to know not only how much money is going out, but also what it’s being used for and whether the purchase is ultimately beneficial for the organization. This is where PO management can help support visibility and organization.
Examples of spending to keep track of include:
- Business trips: Employees often travel to attend conferences or visit clients. Any travel costs (including room, board, and transportation) incurred during those trips must be managed.
- Subscriptions: As more organizations are investing in SaaS tools, finance departments are adding subscription fees to their budgets.
- Suppliers: All the raw materials, supplies, and professional services you procure from third-party vendors can easily be tracked through invoices and PO management.
Some businesses allow for ad hoc expenses, where the employees have some degree of freedom with the company account. Tracking purchases in this case can be a challenge but is certainly possible when attempting to control spending.
What Spend Control Is Not
There’s a key difference between cutting costs and spend control. You aren’t trying to minimize spending; you’re setting up a budget and ensuring that all purchases made fit into that budget. You want to achieve strategic spending so that you’re getting the most out of your money and not spending unnecessarily.
Spend Control vs Cost Control
Spend control is also different from what most businesses refer to as “cost control.” While regular expenses like utilities, rent, essential raw materials, and employee salaries are worth managing, they are consistent enough that little discretion is necessary when money is spent on them. Spend control largely deals with the variable expenses that are more difficult to manage, such as company credit cards or any expenses handled by the accounts payable department.
Empowering Control Through Data
To achieve spend control, companies should strive for spend visibility, or an awareness of where purchases are made and who makes them. Spend data is therefore the main weapon against frivolous transactions, as it allows you to optimize your processes and tune your product development in ways that help balance the budget.
In other words, business intelligence and data collection is the key to drawing long-term value out of all your purchases. The use of automation, data analytics tools, and centralized platforms naturally applies itself well to enterprise-level spend control.
Why Does Spend Control Matter?
Don’t think that spend control is some sneaky tactic that only a small portion of management teams deal with. Controlling where your money flows is paramount in any organization regardless of size or industry. If you don’t have proper visibility into corporate spend, you run the risk of cash flow problems and lower revenues in the long-term.
This issue has been emphasized in recent years with the COVID-19 pandemic, but even lucrative times still call on an ability to monitor and report on financial activities within the business. Without proper spend controls, you run the risk of:
- Poor budgeting practices: You can’t form a reliable budget plan if you don’t know where money is being spent. Your teams might need more funding than you originally thought and consequently run into setbacks during daily operations. A good budget is based on accurate spending data from previous quarters.
- Unnecessary paperwork: If there’s no standard way of recording transactions, you end up in a situation where many purchases were made without a receipt or without proper recordkeeping practices. Finance teams would then have to chase after the right documentation during the closing process, which builds on the tedium of the entire procedure.
- Human error: Tying into the excessive paperwork, an inefficient spend control system results in a ton of manual processes that can all potentially introduce human error. If not caught in time, mistakes can cause serious problems during tax season or when looking at the budget at the end of the quarter. A large part of spend control relies on automation for this reason.
- Fraud: Expense reporting fraud, whether intentional or not, is unfortunately common in the corporate sphere, as is credit card fraud. One study concluded that 85% of employees lied on an expense report to receive extra reimbursement. By implementing spend controls on employee expenses reimbursement, finance teams can detect and prevent fraudulent purchases on the company account.
- Uninformed business decisions: Executives and management rely on financial data to make informed business decisions. Without spend visibility, you can’t set meaningful objectives for the company to follow.
The Benefits of Effective Spend Control
Benefits of effective spend control from spend management solutions include:
- Risk management: Your business can reduce fraud risks and risks of overspending.
- Spend visibility: You’ll gain more spend management insights for spend analysis, business intelligence, and decision-making. System users with role access will have the same information views into spending. When the integrated ERP or accounting system provides real-time visibility, your spend management software should also provide real-time visibility.
- Better quality and pricing: Your company can select and negotiate with approved suppliers and vendors to get better quality and pricing, volume discounts, and early payment terms on items purchased. When your company has fewer and better suppliers for procurement, you’ll save money managing the supply chain.
- Maverick spend reduction: When your tools include controlled employee-issued corporate cards with spending limits, you’ll control maverick spend better for low-cost and low-volume items (like office supplies or business meals) that don’t require purchase orders. You may also find specialized software solutions for controlling maverick business spend.
- Company policy compliance: Company policy is enforced through approval policies for valid supplier invoices and only business-related employee travel and expense reimbursement.
- Operational efficiency: With spend control software using automation, you’ll streamline business processes to remove bottlenecks, save substantial time, and require fewer new hires, generating cost savings.
- Data accuracy: Automated spend management systems for procurement and accounts payable, integrated with your ERP, provide more accurate information. These spend control systems use extensive automated error-checking rules and replace manual data entry and spreadsheets that are prone to human errors.
- Better financial performance and accuracy: Spend control lets your company improve gross margin and bottom-line profitability. Your cash and financing needs are lower, with better cash forecasting and financial planning insights. Unified spend management systems, integrated with your ERP, give you better cash flow visibility for payments.
When Should I Look to Improve Spend Control?
What are some symptoms that show that your spend control needs work? Going beyond the obvious boost to revenue, spend control helps whenever you find yourself:
- Working with low budgets all the time
- Having to deal with errors and mismanaged funding
- Finding out that employees have little guidance when making purchases
- Working with poorly defined procurement protocols
- Lacking in proper approval workflows for important transactions
- Failing at making decisions because of low business intelligence
- Spending too much time with manual, paper-driven workflows
Even if you aren’t seeing these signs yet, spend management control is still essential for any business to avoid these problems and stay competitive in the future.
What tools pave the way for more efficient spend control?
How To Implement Best Spend Control Practices
Thankfully, implementing spend control practices and tools into your business is relatively easy and inexpensive. The process is well worth the savings in the long term. Some aspects to consider in this regard follow.
General Spend Control Best Practices
First off, replace old credit cards with dedicated employee payment methods. Traditional payment methods just aren’t designed with business use in mind. As mentioned before, problems are common in employee expense reports and company credit cards when it comes to controlling spending activity.
Instead, think about using physical or virtual cards with customizable limits. These solutions automatically collect expense data and handle invoices for you, reducing the need for expense reports and giving you more control over what you’re purchasing indirectly through staff.
Also focus on practicing continuous accounting by looking up and checking the financial information of the company regularly rather than just at the end of a month or quarter. Real-time updates are necessary to address brief cash flow problems and mistakes in recordkeeping.
Working with Expense Data
Don’t forget to focus on data collection as well. Spend data can be challenging to gather, as it often comes in multiple formats and from many different sources. Even worse, many companies are siloed to the point where sharing information in one department with another is difficult.
As we’ll discuss later, breaking down these barriers involves keeping your spend management centralized. These spend data management solutions work by processing data and streamlining it into a consistent format for easy spend analysis and analytics.
- Find where expenses are coming from, whether it’s from utility bills, salaries, licensing, advertising, travel, insurance, or otherwise.
- Centralize all the information together in one place rather than keeping it all scattered around your departments.
- Making the format consistent across all your spend data. In addition, you want to cleanse it by removing mistakes and duplicates.
- Figure out next steps by analyzing the spending and seeing where you can make changes to improve ROI.
Over time, businesses can reference their own purchasing patterns and develop spending strategies while consulting with internal stakeholders.
Understanding the Spend Control Tower
If a company’s finances are especially bad, the spend control tower (SCT) is often deployed as a short-term solution to force more efficient spending through direct control. The company sets up a team of decision-makers (the “SCT team”) and requires employees to request approval for new expenses directly from this team. Approvals are made often within a few hours.
Regardless of current spending protocols and mechanisms, the tower takes precedence above all else and handles all types of purchases for a short time. The result is a deliberate and disciplined procedure for approving spend compared to an uncontrolled policy.
While rather “brute force” in nature, SCT can be effective in some cases to cut down on unnecessary expenditures in a short time. It also becomes more efficient over time as standards of approval are naturalized and automation helps cut down on human intervention.
Making the Case For a Centralized Procurement Platform
Many of the challenges organizations face when implementing spend control solutions can be fixed through the use of a centralized procurement platform. There are many reasons why this approach should be considered. The best spend management tool for procurement provides these solutions.
- Centralization: Achieving spend visibility, a major component of spend control, can only be done when all your financial activities are centralized on a single platform. Such a service would present all data analytics through a dashboard for easy reference. Every payment, no matter how small, can be recorded for financial managers to look at at any point. And the data is all in real time as well so that you aren’t waiting until the end of a financial quarter to make your decisions.
- Fraud detection: A corollary to this point is fraud prevention. Company cards and self-written expenses reports are difficult to track and are prone to fraudulent charges. Worst of all, it’s not uncommon for businesses to be unaware of such activities until many weeks later. Spend control platforms instantly alert you to these purchases so that you can respond to them promptly.
- Enforcing policy: It’s easier to enforce your spending policies through a procurement platform. Most of them allow you to build your own restrictions on the payment methods employees use. For instance, a spending cap per month can be instituted, and teams will have to submit a formal request for additional funding if necessary.
- Accelerated approvals: An automated approval system also helps speed up the process and prevent teams from having to wait for needed funding. From your end, all you have to do is set up pre-approval parameters and just wait for notifications on your personal device whenever someone in the business requests funding. Spend control doesn’t have to be a speed bump in your daily operations.
- Digitization: Another popular feature is the ability to turn all paper receipts and invoices into digital copies. The elimination of paper workflows has become a major source of pressure for expense managers, according to one report. It’s almost impossible to lose important documentation when making purchases this way, and the process couldn’t be easier on the employees’ side. Just scan the papers with a mobile app and instantly record expenses accurately.
To improve spend control in your business or organization with an automated procurement system, explore more.