Spend management is an important part of financial management for businesses – and particularly for large companies that have significant and complex spend. Here’s what you need to know about how to improve your approach to this important process.
Spend management is the practice of managing supplier relationships and purchasing across an organization to minimize cost and risk. But, despite its importance, it’s not without its challenges. Manual processes, of which spend management is made up, can be both inefficient and create vulnerability to the risk of fraud and human error.
However, by taking a more robust, sophisticated, and technological approach to spend management, companies can address these challenges, drive greater visibility, and reap the benefits of automation, unlocking opportunities to improve spend practices across the organization. First, though, they need to have the right strategy in place.
Let’s look more closely at what procurement spend management is, the challenges companies may face in this area, and six steps organizations can take to boost the effectiveness of their approach.
What is spend management?
Spend management is a continuous process that involves managing, analyzing, and controlling the way money is spent across an organization. As such, it encompasses numerous procurement-related activities, such as budgeting, sourcing, negotiating supplier discounts, analyzing spend, managing supplier relationships and managing inventory.
The volume and complexity of spend varies considerably across organizations. For smaller companies, spend management may take the form of simple expense tracking, whereas large multinational manufacturers will need to keep tabs on high volumes of expenditure across the organization.
Different organizations will have different types of spend to manage. These may include the costs associated with:
- Raw materials for manufacturing
- Office supplies
- Software costs
- Travel expenses
- Employee salaries
For companies looking to gain more control over their expenditure, there are a number of strategies that can be deployed as part of the spend management process. For example, spend or procurement policies can be put in place, setting out which types of expenses employees can incur, details of relevant limits, and the processes that employees need to follow. Companies might also carry out employee training or adopt spend management or supply chain management software in order to automate processes and improve visibility over spend.
Common spend management problems
The spend management process is not always straightforward. The following challenges and problems can all be encountered when carrying out spend management:
- Human error and fraud. Human error is a factor to be aware of in any area that relies on manual processes. Errors can result in the wrong items being purchased or data being entered incorrectly into the spend management system, which can impact the effectiveness of decisions the company makes about its spend. Likewise, companies that lack robust and secure processes may be more at risk of fraudulent purchases.
- Inefficient processes. Manual processes are inherently inefficient, meaning that people may be spending more time than necessary on spend management processes. This means that less time can be spent on new initiatives in accounts payable and the procurement department that can bring about better ROI.
- Unclear policies or procedures. If staff are not fully aware of restrictions on spend, they will be less likely to comply with them. This, in turn, increases the risk of maverick spend, whereby staff make purchases that do not comply with the company’s current policy and processes – meaning that purchases may fail to take advantage of negotiated discounts. This can also have an adverse effect on relationships with approved suppliers.
- Poor or non-existent centralization. It can be difficult to manage spend effectively across an organization when different types of spend are managed by different departments – each of which may manage their data and records in different ways. Without a centralized spend management process, companies may struggle to track spending effectively or implement improvements.
Ways to improve spend management
So how can organizations improve their existing spend management processes? With the right strategy, it’s possible to overcome the challenges that spend management involves and drive greater efficiency and automation across the process. In particular, it’s worth considering the following steps:
Analyze current spend
Before any improvements can be made, it’s important to understand the current situation. Start by auditing and analyzing current business spend data – an exercise which includes looking at existing spending patterns, identifying anomalies and cost savings opportunities, and identifying which vendors are performing well and providing value for money.
It’s also important to categorize different types of spend into different buckets, such as materials, utilities, employee expenses, and IT. By doing so, you can gain more visibility over spend and compare like with like, making it easier to understand existing bottlenecks and identify opportunities for improvement. Depending on the nature of your business, it’s also often appropriate to adopt different strategies for different categories of spend.
Adopt a centralized spend management platform
By centralizing spend management, you can gain more visibility over the process, which is particularly important if your spend is managed by a large team. This may involve adopting a dedicated software solution, which will also typically include other features that can help optimize spend. Alternatively, you may opt to create a bespoke solution in-house.
Automation is key to achieving greater efficiency – and in the area of spend management, there are plenty of opportunities to automate processes. By adopting either all-in-one or dedicated spend management software solutions, you can streamline processes and achieve greater automation across activities such as supplier management, inventory management, and purchasing.
Renew policies and procedures
Policies and procedures are one of the most important factors when it comes to controlling spend. As such, it’s important to keep the relevant documents up to date so that they continue to be a good fit for your organization’s needs as the business evolves. Likewise, employees should be educated on best practices in order to keep their knowledge current and reinforce the importance of complying with your chosen spend practices.
Once the previous steps have been carried out, you’ll be in a better position to forecast future spend and choose more intelligent spend management strategies. You may also consider taking additional steps to further improve spend management activities, such as using prepaid virtual cards or taking advantage of AI-powered spend analysis.