Few activities in business have as much impact in reducing costs, eliminating waste, detecting fraud, and improving the bottom line than spend management. It is the foundation for operational efficiency, cost containment, and visibility throughout the company.
“Unlock the Power of Spend Management: A Guide for Small and Mid-Size Businesses” shows how your business can overcome some of the biggest challenges facing small to mid-size businesses (SMBs) today:
Sign up for a Free Trial today
Key Takeaways
SHORTCUTS
Spend management entails collecting, collating, maintaining, categorizing, and evaluating spend data. Spend management helps maximize value, increase operational efficiencies, lower procurement costs, mitigate financial risk, improve supplier relations, manage workflows, and regulate compliance. Top-performing procurement strategies align spend management with broader business priorities.
Spend management includes:
Requisition processing, budgeting, planning, supplier management, contract and inventory management, sourcing, and product development can also fall under spend management.
Effective spend management results in efficient sourcing and procurement, regulated expenses, sound business spending practices, and reduced fraud and errors. It also increases spend visibility, which contributes to better cash flow.
The procurement cycle is the steps and procedures businesses use to obtain goods or services. The procurement process is typically made up of six steps:
Spend visibility is measured by the company's ability to track how, where, and why capital is used. Spend visibility implies a transparent view of the entire purchase cycle. A company's spend visibility increases when finance teams can more accurately see where company money is being spent.
Spend management considers all types of business expenditures, including expenses, inventory purchases, and equipment. Spend management focuses on reducing the costs of procured items. Expense management is a control system that includes company policies, software for tracking employee expenses, handling expense report reimbursement, and tail spend management of routine, low-cost purchases.
Managed spend is any expenditure under the company’s defined procurement cycle. Unmanaged spend happens outside the procurement cycle. It includes purchases that have been made without any contract or previous bidding and negotiation.
Spend management has two main categories: financial and operational. Financial spend management tracks and manages spending across departments. Operational spend management oversees procurement processes and inventory levels, ensuring products and services are available when needed.
A spend management system:
Spend management’s impact on a business is enormous. A study by McKinsey reports that external spending comprises 40-80% of a company’s total cost. Effective spend management:
Effective spend management strategies and processes:
Adjusting to fast-changing conditions, handling rapid expansion, and managing cash flow successfully is crucial to a fast-growing company’s success. Effective spend management establishes spend management controls to increase spend visibility and nimble control over purchasing.
Poor spend management leads to low spend visibility, poor spend compliance, and higher transaction costs. Poor spend management can also contribute to suboptimal workflows, unclear guidelines, and insufficient control, resulting in increasing procurement costs and higher expenses overall.
Spend management is a complex process involving a broad range of activities across the procurement cycle, including:
Each organization's activities and processes may differ depending on its industry, size, and requirements. A spend management process provides the structure, data, and spend visibility needed to manage these activities, identify problems, and support improvements. Having a process helps you control costs, manage risk, and make more informed decisions.
Identify expenses and company spending
Centralize expense data
Verify data
Create spend categories
Analyze spend data
Define a strategy
Forecast and plan accordingly
Spend analysis is the process of collecting, cleansing, classifying, and analyzing spend data. In addition to reducing procurement costs and identifying trends and insights, spend analysis can help improve:
Spend data can come from various sources and systems, such as purchasing history, payment data, contract terms, performance levels, and credit card data. Using data about organizational expenditures on services and goods purchased from external suppliers, spend analysis helps firms make better purchasing decisions while minimizing risks. It also gives you the data to work with your vendors to build collaborative relationships and strengthen your supply chain.
Start by addressing the following key questions:
Develop key performance indicators (KPIs) to measure your data against targets and evaluate your organization’s performance. KPIs for spend management should include:
Ultimately, spend analysis should help you understand the amount of money spent with suppliers and track your cost reduction efforts.
By producing a single source of truth for your spend reporting, you can identify trends in your organization’s spending habits. You can also find areas for improvement. The insight gleaned from spend analysis also helps you negotiate better contracts, since you understand your spend per supplier.
Use your lessons learned to make the right changes to improve your procurement process.
Spend analysis isn’t episodic. It should be a regular and recurring activity so that procurement teams can continuously improve their processes. This will result in cost savings, greater efficiency, and increased profits as they occur.
A company lacking the guidance of a strategic spend management strategy could find itself consistently losing money and missing business opportunities. Without a formal spend management plan, a company could lose its competitive advantage due to growing inefficiencies, unnecessary expenses, and damage to its supplier relationships and reputation. Establishing a strategic spend management plan is crucial to a company's success and sustained growth.
Strategic spend management encompasses designing, planning, developing, and implementing spend controls, systems, and processes to ensure a high profit-loss ratio on expenditures. A spend management strategy should be aligned with business strategy and goals and is based on solid data and analytics.
An effective strategic spend management plan:
Data fuels a successful spend management strategy. Planning begins with collecting and analyzing information on your current expenditure processes. Accurate, real-time spend data continues to drive the long-term execution of your strategy.
Key point: Your strategy should address spend management holistically. Meaning: To be successful you need to collect data and seek input company-wide.
Your business spend management strategy needs to be tailored to your business strategy and operations. If you’re clear on the goals you want to achieve, your current spending habits and areas for improvement, you can build an approach that works for your business.
Spend management best practices cover the entire source-to-pay (S2P) cycle. The S2P cycle activities include supplier identification, proposal submission, competitive bidding, contract negotiation, and payment for products and services. S2P could include other functions, depending on the business, size, and industry.
Establishing and leveraging best practices as part of your spend management strategy helps streamline your procurement workflows, ensure accurate ordering and timely payments, and improves supplier relationships through strategic sourcing.
Deploying best practices generates greater efficiency, productivity, and profitability that ultimately elevates the entire business.
Spend management best practices include:
Spend management software bridges the gap between process-specific financial tools, like procurement software, and core systems like accounting platforms.
Here’s a list of leading spend management solutions:
Spend management, Plooto and accounting software can work together to provide a more comprehensive view of a company's financial position. Spend management software can track and analyze a company's spending data, which you can then feed into accounting software. Plooto simplifies and automates cash flow management through a single integrated AP/AR platform, providing complete visibility into the entire cash flow cycle.
Plooto's dashboard enables you to identify and review your:
In addition, Plooto handles multiple payment types, including check payments, ACH, and EFT payments. Plooto Instant is among the fastest methods to pay vendors.
Seamless data integration between Plooto and your accounting software ensures accurate recording of information, correct payments, and a more manageable, faster end-of-month reconciliation. Seamless filtering options enable you to categorize your payments to vendors by amount, bank account, and recurring payment status.
You can filter the raw data and use it for various reporting purposes, such as reviewing specific suppliers. For deeper analysis and reporting, you can easily export this data into an Excel/ csv file, which you can import into third-party data tools for study.
Select spend management software can feed transactional data into accounting/financial software for generating financial reports and analysis.
Analyzing data collected from spend management, Plooto, and accounting software makes it easier to answer questions about what was purchased, how it was paid for, and how it affected cash flow. Companies have a more comprehensive and accurate view of their financial position. In addition, using spend management, Plooto, and accounting software helps reduce errors, increase efficiency, save time, and cut costs by automating manual processes.
In what feels like a roller coaster business climate marked by disruption, uncertainty, and change, businesses must have a transparent and holistic view of managing their spend. Companies that align their spending with their business goals while controlling costs, improving operational efficiency, and reducing risk will stay viable, competitive, and well-positioned to take advantage of business opportunities as they arise.
FREQUENTLY ASKED QUESTIONS
An increase in working capital suggests that more cash is invested in working capital, thus reducing cash flows. Firms with significant working capital requirements will find that their working capital will grow, and this working capital growth will reduce their cash flows.
Consulting services or online software providers generally require much lower working capital. Businesses that have matured and are no longer looking to grow rapidly also have a reduced need for working capital.
CHAPTERS
00 Why Effective Working Capital Management Can Improve Your Entire Business
01 How to Ignite Your Company’s Growth With Working Capital
02 Proven Strategies for Optimizing Your Cash Management
03 Unlock the Power of Spend Management: A Guide for Small and Mid-Size Businesses
04 Liquidity Management Is Crucial to Succeeding in Today’s Hyper-Fast Environment
05 Cash management strategies for small business survival