Spend management

Recession planning: Why spend management matters

Recession – a widely discussed concern and an impending reality, according to financial analysts and economists. Although it's uncertain whether a recession will occur or not, it's advisable for businesses to heed the warnings and prepare for economic headwinds. While recessions can have varying impacts on organizations - from slow collections to revenue losses, these contractions in economic activity typically last around ten months on average.

Preparing for an economic downturn and cultivating resilience can yield long-term advantages for businesses. Regardless of what lies ahead, any endeavors taken towards planning for a recession will not be in vain.

Recession-readiness requires resilience

To prepare, business leaders must prioritize spend management and implement long-term strategies for managing operational costs, maintaining adequate cash flow, protecting reserves, and optimizing working capital. 

CFOs are typically at the helm of these initiatives, playing a critical role in guiding their companies towards greater financial discipline, especially during uncertain times. A recent PwC Pulse Survey found that CFOs are prioritizing cost containment, being ultra-selective about spending, renegotiating vendor contracts, and cutting unnecessary expenditures as they brace for a recession. 

Spend management software can be a powerful tool for businesses looking to improve financial rigor and resilience in preparing for a possible recession and emerging from one even stronger. Let's explore in detail how spend management software can be beneficial.

Gain spend visibility, analytics and actionable insights

To make informed decisions that can lead to measurable and meaningful results, it's crucial to gather comprehensive spending data across your organization before implementing changes. This involves understanding how your business is spending - which employees or departments are spending the most, what they are purchasing, and which vendors they are purchasing from. 

Spend management software can provide a complete overview of current and historical spending, while embedded spend analytics enable deeper insights for informed decision-making and identifying cost saving opportunities.

Reduce the right costs

Business leaders should avoid making hasty decisions in response to economic uncertainty, such as cutting expenses blindly without considering the consequences. In a time where organizations are hamstrung by an influx of resignations and difficulties with skills retention, operational efficiency is paramount. Financial leaders must walk the fine line between optimizing processes and systems, while being cost-conscious, ensuring that any budget cuts are not at the expense of employee productivity or business efficiency.

By analyzing operational spend, business leaders can identify areas of wasteful spending and discretionary spending that can be reduced or eliminated without affecting operations. Spend analysis can reveal trends and patterns, such as overpaying for goods from multiple uncontracted vendors, rogue or unauthorized spending, or recurring claims for unnecessary expenses. To ensure effective purchasing and expense processes, businesses need to evaluate their policies governing these areas.

Implement internal controls

To proactively control spending across a company, it's essential to have robust procedures in place for purchasing goods and services, capital expenditure, claiming for expenses, and arranging business travel. These procedures should be subject to strict protocols to ensure adherence to policies.

By implementing spend management software, internal controls can be configured to monitor spending, minimize the risks of fraud, errors, and non-compliance; factors that can be particularly detrimental during a recession. Spend management software can improve policy compliance by directing spending behavior in accordance with the company's defined procurement policy, while alerting users to potential risks and contraventions.

Example:

Challenge: Overpriced airline tickets or hotel bookings that are expensed after the fact. 

Solution: Configure travel policies that ensure quoting processes and pre-approval of travel-related expenditure. 

Improve spend predictability and budget control

By automating manual processes and gaining real-time visibility into spending, businesses can achieve improved forecasting, better spend predictability, and budget control.

The benefits of spend management software include real-time visibility and spend tracking against available and committed budgets, enabling financial leaders to identify areas of overspending and control costs more effectively. Approval processes ensure that expenses and purchases are authorized, within budget, appropriate, and necessary, while data analytics identify spending patterns and improve spend predictability. 

With more insight into historical spending, predicting future expenditure is data-driven and informed, enabling business leaders to manage budgets more effectively, reduce waste, plan for future investments, and allocate resources strategically.

During or in the lead up to a recession, companies may also face increased scrutiny from stakeholders, such as investors, lenders, and regulators. Effective budget control can help businesses demonstrate their financial discipline and stability, providing reassurance to these stakeholders and maintaining their confidence in the organization's ability to weather the downturn.

Manage vendor spend and renegotiate contracts

Spend management software provides a centralized platform for storing vendor contracts, enabling businesses to monitor contract terms, renewal dates, and expirations. Through vendor spend and transactional analytics, businesses can identify spending patterns, review payment processing trends, analyze purchasing volumes, and pricing variations to make informed decisions when it’s time to renegotiate contracts.

Example:
Challenge: Too many vendors, rogue spending, and high prices.

Solution: Analyze spend by vendor, direct all purchases to approved or contracted vendors that offer the best value, consolidate purchase orders to qualify for volume discounts and leverage your purchasing data to negotiate more favorable terms and early settlement discounts.

Spend management software also facilitates employee collaboration throughout:

•    Vendor onboarding and approval
•    Requisition to purchase order and approvals
•    Quote acquisitions
•    Invoice approval and 3-way matching

By connecting people, processes, and policies you can achieve better alignment, more effective negotiation strategies that result in cost savings, and reduce the risk of overpayment and paying for goods not received. 

Drive accountability

A cost-conscious approach to running business operations is prudent in the current economic climate but should not be limited to times of financial instability. Policies should be communicated and implemented to guide your team’s spending behavior whether the economy is thriving or in a downturn.

Processes that are automated and governed by spend management software can help to establish transparency and auditability of spending activities, making it easier for businesses to identify discrepancies and hold stakeholders accountable. This oversight promotes a culture of responsible spending, reduces waste, and contributes to better financial performance. 

Manage risk

Spend management involves optimizing an organization's spending to boost profitability, while risk management entails identifying, assessing, and mitigating risks that may impede an organization's ability to achieve its goals. Effective spend management can enhance risk management in several ways:

Firstly, by optimizing costs and ensuring that all spending is essential to the business, it becomes critical to maintaining financial stability, avoiding unnecessary expenses, and optimizing cash flow. With greater oversight and proactive control, the risk of financial penalties, overspending, fraud, and non-compliance can be mitigated.

Companies can ensure that spending aligns with their strategic goals and objectives, enabling them to focus resources on initiatives that foster business continuity and growth while mitigating the risk of unforeseen events.

The takeaway

In summary, implementing spend management software can be an effective way for businesses to proactively manage their finances in an economic downturn and beyond. By identifying key areas of spend, analyzing spending patterns, optimizing procurement processes, setting budget controls, and monitoring expenses in real-time, businesses can reduce operational costs, improve their financial performance, and emerge from any eventuality stronger, more resilient, and adaptable. 

Financial leaders can redirect the identified cost savings towards driving growth initiatives, such as introducing new products or services, expanding into new markets, or recruiting additional personnel to support expansion. Additionally, reinvesting in the business is crucial, which could entail upgrading technology or equipment, boosting marketing, and advertising efforts, or investing in employee training and development. By, implementing efficient spend management strategies, redirecting savings towards growth initiatives, and reinvesting in the business, financial leaders can build resilience and position their companies for sustained success.

Would you like to learn more about spend management software and how it can solve your unique business challenges? Schedule a free, customized demo to see Fraxion in relevant business scenarios and discover how it can help you reach your financial resilience and recession planning objectives.


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