Another year of business is approaching its end, and watchful eyes are turning towards CFOs and their ever-tightening purse strings. In 2023, organisations have experienced challenges such as rising energy costs, labour shortages, and supply chain issues — placing financial leaders under more pressure than ever to gain control of outgoing expenditure.
Effective spend management is vital to maintain the financial health of a company and ensure profitability. But what exactly does it address and how could it help your organisation?
Types of business spend
First, we need to consider the different kinds of business spend that your venture might incur. These can be broadly categorised into four distinct categories:
- Direct spending
Direct spend refers to any costs that are specifically associated with the production of the goods and services that your business sells. According to Investopedia, some examples include:
- Direct labour
- Direct materials
- Manufacturing supplies
- Wages for production staff
Managing your direct spend is essential for optimising production processes and maintaining the competitiveness of the final product.
- Indirect spending
By contrast, your indirect spend covers any non-production expenses associated with your business’ daily operations. Essentially, these are the costs that keep your business running but don’t specifically go towards producing the goods or services that you sell. Indirect spending includes expenses such as:
- Office supplies
- Utilities
- External professional services
Similarly, it’s important to manage your indirect spending so that you’re not overspending on the resources that power your business ‘behind the scenes’.
- Tail spending
Tail spending is a little more complicated. According to software spend management platform Vertice, these refer to “unmanaged purchases made within an organisation that fail to pass through an official procurement process.” It’s worth noting that as a result of their low value, “the costs incurred by these purchases are seldom monitored by financing teams”.
But that doesn’t make them unimportant. Tail spends may include:
- Travel expenses
- Print services
- Inexpensive software subscriptions
Smaller, decentralised purchases can quickly accumulate and take up a significant portion of overall spend. Effectively managing tail spend is important for cost control and transparency, as well as for streamlining procurement processes.
- Rogue spending
Lastly, we have rogue or “maverick” spend. This refers to unauthorised purchases within an organisation that are made outside of the established processes. While maverick spending might not have malicious intentions, it can be costly for businesses as it can lead to increased outlay, compliance issues, and reduced purchasing power.
Some examples of rogue spending include:
- Uncontrolled and unknown, e.g. invoices without associated contracts
- Partly controlled and partly known, e.g. incomplete invoices from unfamiliar vendors
- Partly controlled and known, e.g. transactions from approved vendors with details missing
It’s vital to control rogue spending to maintain financial discipline and ensure that resources are aligned with organisational goals.
What is business spend management?
Spend management is a strategy that focuses on monitoring and controlling any purchasing activities occurring within the business. This helps financial officers oversee and reduce organisational spending where necessary.
Specialists from purchasing platform PayEm offer insights into the best practices for spend management, including:
- Creating expense policies
- Conducting regular spend audits
- Adopting spend management solutions
- Leveraging analytics and insights
What are the benefits?
Business spend management equips organisations with a top-down strategic approach to managing their spending. Importantly, this isn’t just restricted to the new procurement of goods and services, but also to the management of invoices, expenses, and supplier relationships.
By overhauling your spend management practices, you could enjoy a range of business benefits. Here are the top advantages to be aware of:
Cost savings
Three-quarters of business decision makers reported rising costs as the top risk to their venture in 2023. Reducing costs is a strategic imperative — and spend management helps to identify any opportunities to do so effectively. When you engage with suppliers to negotiate on contracts, develop your relationships, and optimise procurement costs, you will spend less on your recurring services.
Budgetary controls and policy enforcement will also contribute to maintaining financial discipline within your organisation. With effective spend management strategies, you can ensure that resources are allocated wisely and spending is optimised to provide a competitive advantage.
Higher productivity
By leveraging spend management techniques, many businesses are able to automate procurement and expense management processes. For example, tools like TravelPerk and Quickbooks are used to better manage travel and project-bound expenses, respectively.
These strategies can reduce manual errors, accelerate operational efficiency and translate to substantial time and resource savings. In turn, they allow employees to focus more on their core responsibilities rather than repetitive administrative tasks.
Risk mitigation
Through effective supplier risk management and compliance monitoring, spend management helps business leaders mitigate the risks associated with new procurement. This approach minimises the impact of disruptions in your supply chain, which can have a range of business-critical knock-on effects.
By managing spending, you can also ensure that all purchasing is aligned with internal policies and external regulations. This reduces the risk of non-compliance with regulations for data and privacy protection, as well as their associated penalties. After all, these can be costly — in May 2023, tech giant Meta was fined €1.2 billion for violating EU data compliance laws.
Ultimately, spend management will help to protect your long-term business strategy. It ensures that you minimise costs, make smarter decisions, and align all spending with your ambitions as a business.
