In the face of current economic challenges, merely managing expected spend is no longer enough. Teams are being asked to do more with less through tightening budgets, restructuring departments, and losing headcount to downsizing. To keep organizations on track through this instability, finance teams must continuously commit to increasing spend efficiency by getting the most out of every procurement dollar.
Achieving improved spending is crucial but is only possible with the right tools. Software provides the necessary insights and best practices to successfully navigate your company's finances and ensure you have money to grow — even through tough times.
Today we’re covering the essentials of spend efficiency and how it goes beyond simple management to create more financial opportunities.
This article details important aspects of spend efficiency, such as:
- What is spend efficiency?
- Why is spend efficiency important?
- How is spend efficiency different from spend management?
- What are the benefits of spend efficiency?
- What are examples of spend efficiency in practice?
- How does software improve spend efficiency?
What is spend efficiency?
Spend efficiency is a methodology that ensures organizations make the most of their money when acquiring goods and services. Companies achieve efficient spend through data-driven strategies like cost optimization, spend visibility, supplier management, and competitive bidding. These strategies help organizations make smart decisions and reduce waste to improve supply chain performance.
Spend efficiency is a component of overall capital efficiency. Capital efficiency refers to an organization's ability to use its financial resources most effectively via:
- Evaluation of investments
- Optimization of working capital
- Using leverage to maximize return on investment
Companies look at capital efficiency as a means to increase profitability by minimizing costs while still achieving desired output levels. This more strategic approach to financial decisions ensures businesses get the most out of every source of capital.
Why is spend efficiency important?
Most companies that fail do so as a result of cash underruns. According to data from SCORE, over 80 percent of businesses fail because of cash flow issues. For this reason, efficient use of resources can mean the difference between thriving and failing. Effectively maximizing the value of spend is one of the best ways to prevent cash flow challenges.
Organizations can take key steps to protect their liquidity and improve spend efficiency.
Regularly monitor budgets and expenses: Companies should track their financial statements regularly, focusing on income versus expenditure. This allows companies to identify and address cash shortfalls in advance. Automated spend management and reporting features make it easier to see where your procurement money is going and how it affects the organization's cash position.
Increase margins: Improving profit margins leaves more money in the bank to cushion against issues and contingencies. By diversifying and optimizing sources of income, companies ensure more stable income even if one or two sources fall through.
Utilize flexible net terms: Net terms may provide useful flexibility to maximize your money while powering growth. Look for opportunities to extend payment terms and build flexibility into contracts and vendor relationships.
Reduce expenses: Reducing operating costs is another way to increase profitability while maintaining desired output levels. This includes renegotiating contracts with suppliers to reduce overhead costs and take advantage of discount opportunities.
Spend management vs spend efficiency
Although these two terms serve the same greater purpose, some nuances separate spend management and spend efficiency. Spend management ensures visibility and budgetary control over the money going out the door. Spend efficiency is centered on creating the most benefit with the funds being spent. Spend management is, therefore, the basis for success in your efficiency efforts.
Spend management is tracking and managing an organization's spending to ensure that the use of each dollar is cost-effective. Organizations employ specific rules, regulations, and processes for procurement to gain budgetary control and visibility into spending. This helps them streamline and improve spend.
Spend efficiency helps organizations identify wasteful spending, increase leverage for negotiations, and improve operational efficiency to produce better cost outcomes. This type of spend optimization can lead to significant cost savings over time, making it an important part of any organization's financial strategy.
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Top 5 benefits to spend efficiency
Spend efficiency improves more than just the bottom line. With a structured approach to optimizing spend, you also create an environment of better decisions, less risk, and scalability.
Cost savings: Using automated systems and processes to measure, track, and analyze your financial dataset and performance metrics helps organizations reduce costs by eliminating wasteful spending.
Improved decision-making: Spend efficiency helps leaders gain a clearer view of spending patterns and trends, improve forecasting, and make more informed decisions about where to allocate resources. This, in turn, can lead to improved profitability over time.
Lower risk: Increased visibility helps companies identify potential areas of financial misuse or fraud before they impact financial health. It helps flag unusual activity in the system, allowing for a quick response.
Faster growth: More capital in the bank means opportunities for more growth. It creates a clear path for resource allocation and provides the cash needed to reach financial goals through capital expenditure.
More opportunities: Spend efficiency helps companies free up capital to reinvest in growth opportunities like new products and services, expanding into new markets, or hiring more personnel. When organizations have an accurate view of where their money is going, they have a much easier time making smarter investments.
Spend efficiency examples
Good spend efficiency touches each aspect of procurement, from sourcing to fulfillment. This presents many opportunities to refine your process, hone skills, and expand the effectiveness of every dollar you spend.
Utilizing negotiation techniques helps businesses get better prices from vendors or other sources. This enables cost-effective contracts and encourages vendors to remain competitive.
Data-driven decision making
Making decisions based on data helps refine your spend process and improve visibility into results. This type of analysis provides insights into what’s working, what isn’t, and how you can adjust for better performance. Centralize your spend data within a procurement platform to make it easier to see all your spend, increase efficiency, and surface savings opportunities.
Analytics and benchmarking
Gathering data on market conditions and competitor pricing allows companies to make better-informed decisions about pricing for materials or supplies needed for certain projects or initiatives. Using software to assist in analysis leverages real-time data and provides the context necessary to optimize spending across every vendor and category.
Use software and digital systems to streamline processes and improve efficiency. Automation reduces paperwork, eliminates errors, and provides a quicker way to fill supply needs without manual labor. It's also a considerable competitive advantage, with 83 percent of procurement professionals reporting that fewer than 50 percent of their procurement processes are automated, according to reporting from Zumen. Those that automate realize significant savings and growth opportunities.
Improve spend efficiency with software
Software makes spend efficiency possible at scale. It streamlines your purchasing processes and creates visibility into your spending without the burden of manual research or data entry. Many platforms offer spend management to help you see your spending, but Order.co is the first and only platform that directly improves spend efficiency. Choosing Order.co gives you these benefits and more:
- Flexible net terms and Order Credit options to extend your spending power and improve your cash position
- Access to a network of trustworthy, competitively priced vendors from the Order.co network
- Permission-based spend guidelines to ensure your procurement policies and budgets are followed
To see how software can create or improve spend efficiency within your organization, schedule a demo of Order.co today.
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