Money management determines any business's long-term success.
Yet many companies fail to do this well. They operate in a cycle of feast and famine, which leads to uncontrolled spending that saps financial strength.
This continues until a business's financial health reaches a tipping point. At this point, many organizations slash costs to make it through the crisis. But without fundamental change, the cycle of uncontrolled spending begins again.
Well-managed organizations know that the cash cycle is the heartbeat of the business. The prime directive of growth is the ability to spend judiciously and convert that spending into revenue.
This careful method of money management is called spend control.
Implementing spend control takes time and attention, but the outcomes of better controls improve every aspect of the business.
We’re sharing the fundamentals of improving spend control:
- What is spend control?
- Why companies need to control spending
- The consequences of ignoring uncontrolled spend
- The key elements of controlling spend
- How technology puts better spend control within reach
What is spend control?
Simply put, spend control is just as it sounds: It's how you control the money flowing out of your business. But spend control isn’t synonymous with cost-cutting—though some spend control techniques do involve streamlining costs.
Spend control is better described as an organization's strategic deployment of cash. Spend management is the collection of policies, practices, and tools that help organizations determine the best possible use of capital. Spend control policies and processes encourage stakeholders to follow the rules.
To put spend control in place, organizations must answer important questions about their spending:
- Who is authorized to spend money?
- How much money can stakeholders spend?
- What approval process is used for spending requests?
- How is spending tracked?
- How are budgets allocated?
Do companies really need to control spending?
Many companies believe their current spending policies are good enough to protect them from the dangers of spending. But there is no such thing as “good enough” for companies interested in improving their financials and increasing growth opportunities.
While spend control protects organizations from the perils of overspending, it also offers a range of benefits to Finance and Operations.
Benefits of controlling spend
Companies that initiate spend controls enjoy better financial performance and more agility in a changing market. Controlling spending increases your options and improves your financial statements.
More capital reserves: The less money you have, the more money you keep. Improving budgetary controls allows organizations to keep more funds in capital reserve. Cash is strategically deployed either to expand the business or bolster it through economic difficulties.
Stronger forecasting: Granular visibility into spending enables accurate budgeting and forecasting. Knowing your spending habits in detail makes it easier to understand how costs affect overall financial performance.
Better contract performance: When you know what everything should cost, it’s easier to negotiate new contracts successfully. Better negotiation is a primary form of spend control. It ensures you get the best price and overall terms from your vendor relationships.
Faster growth: The cash saved through spend control measures can drive growth initiatives, fund research and development, improve business processes, and create more value. A stronger financial performance also opens the door to more streams of funding to improve growth capabilities.
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Consequences of out-of-control spend
Uncontrolled spending isn’t a victimless crime. Though organizations can get by with a thin purchasing process or inadequate budgetary controls, the consequences of uncontrolled spending eventually become apparent.
Blown budgets: The budget becomes irrelevant if you don’t know how much your company is spending. Without spending controls, stakeholders and teams spend what they feel necessary to get things done. This approach often ignores the budget, potential cost savings, existing supply chain relationships, and total costs. At the end of the reporting period, cost performance suffers, and budget overruns become standard.
Weakened financials: Overspending weakens your organization’s financial position, making it harder to secure financing. Weak financial statements make the business less attractive to investors. Overspending (directly or through an unfavorable debt ratio) reduces access to the funds needed to drive growth.
Increased risk: Uncontrolled and unreported spending opens the door to accidental or intentional losses. Purchasing and payment errors become more likely without spend visibility provided by well-managed controls. Procurement fraud is easier to perpetrate in organizations with little to no process, and it’s more difficult to discover.
5 Keys to controlling company spending
While the best method of controlling spending is through software, these best practices make the implementation of spend controls easier and improve the procurement function.
1. Establish a process
When it comes to controlling cash flow, visibility is everything. Creating and documenting your procurement process is the first step in gaining visibility and control. A well-documented process lets stakeholders and accounts payable teams:
- Create intake forms for purchase requisitions
- Route spending requests through appropriate approvals
- Create purchase orders for approved purchases
- Verify and pay for completed purchases
- Conduct supplier management and spend analysis
2. Identify costly spending areas
When considering where your money goes, organizations most often spend significantly in specific categories:
The proliferation of subscription-based software over the past decade has exponentially increased organizational spending on the tech stack. According to Gartner, the average 4,000-person enterprise will spend over $15M on software annually.
More importantly, as much as 30% of software spending is wasted or underutilized. This includes:
- Abandoned tools (called “shelfware”)
- Unused features or services
- Auto-renewing software
- Redundant or similar tooling
- Duplicate contracts for identical tools
Given the many ways companies overspend on software, it’s become a key area for implementing budgetary controls.
Indirect procurement, frequently called “tail spend,” is the small-dollar spending that can’t be tied to a specific project or product. This “everything else” category represents up to 80% of a company’s total purchasing activity, making indirect procurement one of the most significant cash leaks a company will identify when implementing spend control. Using Order for tail spend management can significantly impact tail spend by allowing you actively manage indirect spend.
With travel costs skyrocketing in the face of rising inflation and fuel prices, travel is another big-ticket area for companies. While some spending (such as travel for sales or trade show marketing) boosts sales and drives revenue, budgetary controls in travel expenditures go a long way to control costs.
Here are some examples of travel budget control:
- Establish policies about who should travel, preferred travel methods, and business cases for travel.
- Outline spending on the travel category, including meal stipends, hotel rates, airfare, and allowable expenses.
- Establish preferred vendors for services like ground transportation, hotel selection, car rentals, etc.
- Outline policies for leveraging virtual meetings in place of physical travel.
3. Limit card-based spending
Many companies issue cards for their employees to empower their purchasing. This is especially common for executives, department managers, and field-based employees like sales, marketing, and remote workers.
Corporate Cards: Usually, card-based spending happens on a traditional corporate credit card. These physical cards act like personal credit cards while eliminating the need for expense reports and reimbursements. While corporate cards are a good expense management tool, they aren’t a proactive spend management solution. Without strong budget guidelines, corporate cards can be a source of maverick spend and cash leaks.
Procurement cards: These physical or virtual cards (sometimes called purchasing cards or p-cards) offer the ease of corporate cards with more controls in place. Procurement cards offer stronger budgetary controls, allowing stakeholders to purchase supplies within policies without needing a purchase order. Procurement cards offer automated spending limits, category-based rules, manager approval workflows, etc. Though not perfect, procurement cards offer improved spending controls while enabling self-service purchasing.
4. Extract and analyze data
Effective spending decisions require full visibility into where money goes and why. Collecting and organizing spend data enables spend analysis. Then, spend analysis looks at spending habits and trends to take data-driven actions such as:
- Identifying areas of potential cost savings
- Improving cash flow and reserves
- Conducting financial planning and forecasting
By centralizing spend data with software, organizations open the door to more informed decision-making and planning.
5. Automate spend control
For growing organizations, manual processes make spend controls difficult, if not impossible. Company expenses grow along with the organization. Maintaining, organizing, verifying, and updating spend data becomes a constantly moving goalpost.
Technology alleviates these burdens and yields significant savings and benefits. By automating manual processes, companies save money, reduce errors, improve efficiency, and increase the productivity of finance and accounting teams.
Improve spend control with Order
Spend management software frees AP and finance teams from the endless cycle of purchasing management. Solutions like Order strike a balance between controlling spending and empowering buyers. Order gives CFOs access to real-time data and insights to make decisions and create a stronger financial roadmap.
Order provides teams with fully-featured spend control:
- Automated workflows for requests and approvals
- Dynamic spend policies and spending limits
- Curated purchasing through preferred vendors and providers
- Real-time visibility for spending data
- Timely payments that enable early-pay discounts
- Reporting to help teams improve the bottom line
If better spending controls are a priority for your organization, schedule a demo of Order.