Operating a business is expensive. According to the U.S. Bureau of Labor Statistics, 65% of businesses fail within their first ten years, and much of this is largely due to poor financing and cash flow. One thing is clear: no matter the size of your business, you need to manage the daily expenses your business incurs to operate effectively. Fortunately, business spend management solutions can help you do this.
But first, let’s uncover the importance of spend management, and the untapped savings you could generate by managing indirect spend, or operating expenses.
What is spend management?
Spend management refers to the function of tracking, controlling, optimizing, and analyzing spend to maximize every dollar spent. From supplier approval to payment, best spending practices are implemented to standardize and automate all company purchasing to bring more spend under management. This process, and the visibility it enables can help finance teams implement cost reduction strategies to drive savings they can redirect to business growth or profitability.
Indirect spend management deals explicitly with managing the sourcing of goods and services related to the business’s internal operations (E.g., rent, office supplies, utilities, travel, and marketing services) as opposed to direct spend, which is used to create products or services for customers. The potential to reduce costs in the indirect spend category is often underestimated but, if managed effectively can generate savings of 15 to 20%.
The importance of spend management
Without a defined spend management process, volumes of low-value purchases can take place without the appropriate approvals. With no visibility into the impact of this unmanaged spend, budgets can quickly be exceeded; an all too familiar scenario that’s often only detected after-the-fact.
Business spending tends to occur in silos by department, location, or business entity. For instance, a marketing division will spend money to fund their advertising initiatives. Meanwhile other departments like IT will purchase hardware and SaaS licenses to fulfill a team’s operational requirements. Ensuring that this expenditure does not exceed related budgets can be challenging, especially when multiple spreadsheets are in-play, and budget tracking does not occur in real-time.
While manual spreadsheet tracking and email-based processes are usually more inefficient than effective, adding a disparate tool to manage expenses or travel, further divides your financial outlook. This siloed system for managing business spending offers little visibility or control, meaning you have no single source of truth for measuring if your business is cost effective overall. These challenges are further exacerbated in remote working models, with no visibility or standardized controls, unauthorized spending can quickly escalate.
On a long-term scale, poor spend management can cause businesses to default on their obligations, which compounds and leads to dire financial troubles.
Alternatively, with sound spend management practices, you can gain complete oversight and control of your employees' spending behavior and make more preemptive and strategic decisions, while equipping your team with the products they need to be effective. Business spend management solutions facilitate this goal by digitizing best practices and enforcing compliance across all internal expense and purchasing processes.
How spend management supports small- and mid-sized companies
Small- and mid-sized businesses often feel the impact of their spending more. Although spend management is integral to financial success across the board, large corporations may not go into the red from poor spend management practices as easily, if they have higher profit margins.
Meanwhile, small- and mid-sized businesses must take extra care to stay on budget to remain profitable and fund growth aspirations. If spend is not under control, opportunities to redirect savings could be missed or the bottom line could be impacted.
Due to resource constraints, small and medium-sized businesses have limited capacity to define and implement spend management processes and policies. This often occurs where no procurement department exists and there’s no structure or oversight of how goods and services are acquired, or the suppliers that are used.
An effective spend management strategy begins with a well-defined and robust purchase requisition process. Fortunately, business spend management solutions can replace the inefficiencies, lack of control, and delays associated with manual processes to create a streamlined and effective process.
These flexible solutions scale as headcount and operational spending increases, and guides all functions of the procure-to-pay process, including:
With a solution in place, you can achieve end-to-end spend management by proactively managing outflow to protect inflow and ensure adequate operating cash flow.
Key spend management benefits
Businesses frequently turn to spend management software when they realize they’re overspending—and this is the ideal strategy for solving out-of-budget and unauthorized expenditures while outlining a clear path to financial health. However, many businesses are shortsighted and fail to prioritize spend management when problems have not become apparent yet, which is a misstep.
Spend management offers benefits at all operational levels. From saving time and unnecessary stress for end users, to improving efficiencies, internal controls, and auditability for finance teams, and the strategic oversight it lends business leaders, proactive spend management is always recommended and good practice. With a business spend management solution, you gain:
Greater control of spend
By deploying a business spend management solution, you can configure a procure-to-pay process that aligns with your purchasing policies, budgets, and approval hierarchies. Defining and automating these spend management workflows ensures that all transactions and business spending is requested, approved, and tracked in detailed audit trails. Doing so ensures accountability, encouraging staff only to purchase the items they to be effective in their roles.
Operational efficiency
A business spend management solution also enables faster purchasing processes and more efficient operations for all employees across locations. Employees can submit purchase or expense requests on the go via a secure mobile app or web browser. Approvers get real-time alerts and can review budgets and authorize, reject, or request further verification, wherever they are. Accounts payable processes are simplified; with centralized digital records, the days of lost purchase orders, matching inefficiencies, and duplicate payments will be over.
The end result is purchasing cycle times that are significantly shorter thanks to automated, collaborative workflows that eliminate delays, bottlenecks, and the late payments and fees associated with them.
Enhanced profitability
Although there are many benefits to implementing business spend management solutions such as time savings, ease of use and fewer headaches, one that will boost your business case is the potential to enhance profitability.
First and foremost, the core purpose of a spend management platform is to help you reduce unnecessary or wasteful spending. Effective solutions will help you:
- Eliminate unauthorized spending
- Gain 100% spend visibility
- Analyze and report on spending for better decision-making, budgeting, and spend predictability
- Spot costly, noncompliant, or once-off purchases
- Ensure supplier approval
- Consolidate purchase orders to gain volume discounts
- Prevent late fees, overpayment, and duplicate invoices
- Reduce purchasing cycles
- And put working capital back into your business and growth goals
Build better spending habits with business spend management solutions
If your organization is still relying on spreadsheets and manual or paper-based systems to manage spend, you’re not reaching your full efficiency, visibility, and cost-saving potential.
Business spend management software offers insight into purchasing processes, uncovering the trends that you need to be aware of to reduce costs and realize savings. By extending visibility and control to the edge of your organization, you empower each user to be accountable for what they spend, while simplifying their processes, and guiding their purchasing decisions. You gain the advantage of proactive spend management that does not require costly and inefficient corrective action.
To learn more about business spend management solutions and how to build an effective strategy, read our recent blog.