How to identify cost-saving opportunities and optimize spending

In today's economic climate, it's more important than ever for financial leaders to find ways to optimize spending and reduce costs. Spend management should always be top of mind, but it becomes even more crucial in times like these when businesses need to be lean and agile to stay competitive and survive.

How can you go about identifying cost-saving opportunities and where do you begin? In this article, we’ll explore practical methods for identifying cost-saving opportunities and ways to realize spend optimizations by leveraging spend analytics tools.

But first, let’s gain an understanding of the potential risks of not proactively managing spend and practicing financial discipline in your business.

What are the risks of not managing business spend effectively?

• Overspending: Without adequate spend management, a business can easily overspend and exceed budgets on unnecessary or unapproved expenses, that can negatively impact financial performance and overall profitability.
• Compliance issues: Poor spend management can result in compliance issues, such as failing to comply with tax laws, regulations, or accounting standards.
• Inefficient processes: Inefficient purchasing processes can lead to wasted time and resources, as well as increased costs and risks.
• Cash flow issues: With a lack of visibility and ineffective spend controls, a business can struggle to maintain positive cash flow, making it difficult to meet financial obligations or invest in growth opportunities.
• A lack of resilience: During periods of economic uncertainty, businesses that do not exercise caution in their spending practices may find themselves lacking the resilience and resourcefulness to operate effectively under financial strain, potentially resulting in reduced ability to weather economic downturns.
• Missed growth opportunities: If a business is not reducing costs, it may miss out on opportunities for growth and expansion. This can limit the business' ability to compete in the market and may ultimately lead to decreased market share.
• Decreased investor confidence: If investors perceive that a business is not taking steps to reduce costs in uncertain times, they may lose confidence in the business' ability to succeed. This can lead to difficulty in securing additional funding. Poor spend management can damage a company's reputation, as it may appear to stakeholders that the company is not being responsible with its finances.

As you can see, the risks are broad in scope and can result in significant consequences.

So, what can you do to identify cost-saving opportunities, manage and optimize spending in your business?

Take control of your operational spend

Are you managing your operational costs? Operational costs or indirect spend essentially refer to the costs associated with running day-to-day business operations. While these costs may not be directly related to product and service delivery, and may seem insignificant, they can account for a large sum of your total spend and impact your company's bottom line. This category of spend is often unmanaged, overlooked, and the savings potential grossly underestimated.

These costs vary from one company to the next, and can include office supplies, IT services, employee expenses, travel, entertainment, rent, utilities, and more. If left unmanaged, these costs can eat away at your profit margins, unnoticed. With many stakeholders involved, and high levels of low value transactions occurring at all levels in a business, operational costs can escalate quickly. An example: Many companies fall into the trap of SaaS subscription bloat, where employees sign up for subscriptions with low monthly costs, bypassing approval processes. As a result, businesses end up paying for numerous subscriptions that continue to accumulate over time, even if they are no longer in use - wasteful, unmanaged, and under the radar.

It's important to approach cost reduction in a thoughtful and strategic manner. Recognizing necessary and unnecessary costs is an essential step in the cost containment process. Simply cutting costs without consideration can have unintended consequences and negatively impact your business operations. By leveraging spend management software with spend analytics tools you can develop and maintain a cost-saving strategy that is tailored to your business needs and achieving its goals.

Analyze your spend

The first step to achieving effective spend management is to conduct a thorough analysis of your spending to identify areas where costs can be reduced. Analyze your day-to-day purchases against budgets, review recurring expenses, evaluate your vendors, and assess travel and employee expenses. This will help you identify areas where waste and overspending may be occurring, and where process improvements or more controls are required.

Here are the steps for conducting a spend analysis. These processes are simplified, accelerated, and more effective with the help of spend analytics tools or spend analysis software.

• Collect data: Collect current and historical spending data from various sources, such as invoices, purchase orders, and expense reports.
• Categorize spend: Categorize the spend data into meaningful categories, such as by vendors, departments, locations, or budgets. This step helps to identify areas of high and low spending and provides insights into purchasing patterns.
• Analyze the spend: Analyze the spend data to identify trends, patterns, and opportunities for cost savings. This step involves comparing spending across departments and vendors for example, identifying outliers, and investigating the root causes of high spending.
• Identify cost-saving opportunities: Examine the data for areas of high spending, price variances, and identify opportunities to negotiate better prices with vendors, consolidate purchases and the number of vendors you purchase from, and implement process improvements.

Once you have a clear understanding of your business’ spending patterns, what your team is purchasing, how much they’re spending, and which vendors they are buying from, you can begin to implement strategies and processes to manage costs more effectively.

• Develop an action plan: The action plan should include timelines and responsibilities for each opportunity.
• Create or revise budgets: Create budgets based on the analysis of costs to ensure that the business is operating within its financial means.
• Monitor and track progress: Monitor and track the progress of the cost-saving initiatives to ensure that they are implemented successfully and that the expected savings are realized. Automating processes can help you achieve the required level of oversight and compliance.

Spend management software with embedded spend analytics tools can provide a solution for not only automating processes and managing spending effectively, but analyzing, and reporting on it to identify opportunities for cost-savings and efficiency improvements.

5 Ways to realize cost-savings with spend management and analytics software

Automate purchasing processes. By implementing spend management tools you can streamline the purchasing process and gain complete spend visibility that enables you to identify opportunities for cost-savings. Digital processes are trackable, auditable, and easily analyzed in comparison to manual or paper-based processes. Identifying problem areas, overspending, and waste is quickly identified and remedied.

Establish automated internal controls. By establishing clear policies and procedures and configuring internal controls for spending, companies can ensure that purchases are necessary, approved, compliant, and within budget. These internal controls can range from quoting policies to delegation of authority and escalating multi-level approval workflows that effectively mitigate risk and keep spending under control. This proactive approach to overseeing and managing spend keeps financial leaders on the pulse of spending activity, enabling agility, empowering them to make informed decisions and avoid overspending, while the system drives company-wide accountability.

Implement expense and travel policies to control costs and ensure that employees are spending company funds responsibly. These policies typically establish guidelines for employee expenses and travel, such as limits on meal and hotel expenses, requirements for pre-approval of travel, and guidelines for booking travel through approved vendors. By having clear policies in place, companies can reduce the risk of overspending, minimize the potential for fraud or misuse of company funds, and improve compliance. Additionally, expense and travel policies can help to streamline the expense reporting process and reduce administrative costs associated with managing employee expenses.

Manage vendors and relationships. By analyzing your company’s spend by vendor, you can identify areas where you can reduce costs, negotiate better deals, or consolidate orders to qualify for discounts and savings. With approval processes for onboarding new vendors, leveraging internal catalogs or integrating strategic vendor PunchOut catalogs, you can direct spend to preferred or contracted vendors that offer the best value and qualify for more favorable terms and discounts.

Leverage advanced spend analytics tools. By implementing spend analysis software, business leaders can gain deep insights into a company's spending. Spend analytics tools can help identify spending trends, opportunities for cost-savings, and areas where you can improve your spending practices. Advanced analytics can give you insights into:

• Spend by employee: How much each employee, department, or company is spending.
• Spend by vendor: Which vendor your employees purchase from, and how much they are spending with each vendor.
• Budgets: Available, committed, and budget to actual analysis.
• Transactional spend

With this level of granularity and reporting capabilities, opportunities to save are quickly identified and the purchasing insights provide:

• Practical tips to improve process efficiency.
• Improve spend predictability and budget planning.
• Identify alerts and which risks or contraventions are occurring and could require more control or policy enforcement.
• Guide and inform decision making around departmental budgets and vendor consolidation and selection.

By implementing these practical tips and going digital, companies can continually optimize their spending and identify cost-saving opportunities. Spend analytics tools and spend management best practices can help businesses reduce costs, build resilience, and improve their bottom line, in uncertain times and beyond.

How Fraxion can help

Fraxion’s spend management solution empowers cross-industry organizations worldwide to easily track, manage, and analyze their spending. With embedded Microsoft Power BI-enabled spend analytics tools, business intelligence, and reporting power, we’re helping companies achieve complete visibility of their spending, inform decision-making, and identify opportunities for cost-savings to proactively build resilience and financial discipline business-wide.

To see how you can gain insights from your company’s spending to reduce the right costs and save, request a custom Fraxion demo today.