Spend Management Strategy: 5 Steps to Master

When the COVID-19 pandemic struck, we were all affected to some degree, businesses weren’t the exception. And while it’s certainly true that we are no longer threatened by the force of a pandemic, our supply chains are still at risk of being challenged by unexpected situations like the rise of climate change, a shortage of workforce, and geopolitical uncertainties. 

All of this contributes to an increasing pattern of higher costs for businesses. 

The solution? Well, nobody is 100% sure but, one thing is certain, spend management is at the top of the list of priorities for any business owner. 

So why not learn more about it?

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What Does Spend Management Mean?

Spend management refers to the systematic process of overseeing, analyzing, and optimizing your company’s expenses while reducing vendor risk.  This involves understanding where money is being spent, assessing spending patterns, and implementing strategies to be sure that your resources are allocated efficiently. Spend management works to enhance financial performance and still maintain quality and service levels.

Seeing already why it’s important?

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The Spend Management Process 

• Be aware of your business expenses
• Data analysis
• Categorize spend data
• Strategy development
• Forecast spend needs
• Monitoring and reporting 

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Be aware of your business expenses

This may vary depending on the size and industry of your business, but overall general expenses include operational and administrative costs, research and development costs, inventory purchases, employee salaries and benefits, outsourced services, marketing expenditures, and sales commissions.

Data analysis 

Businesses need to undertake an in-depth assessment of their spending data to uncover trends, variances, and opportunities for potential cost savings. To facilitate this process, it’s a good idea to select an advanced automated software system designed specifically for spend management.

Categorize spend data

Think about the most relevant categories for your business spending based on different types of expenses. To make your data even clearer, try creating subtotals for each vendor. Once you’ve established these categories, your spend management system will take care of the rest automatically.

Another tip to consider is to perform a benchmarking analysis to see how your company is doing compared to competitors. 

Strategy development 

Creating strategies to manage spending more effectively is the next obvious step, you might know what’s wrong but now you need to do something about it. Overviewing your spending patterns, selecting a course of action, and considering negotiating better terms with suppliers or consolidating purchases, are some of the strategies you can implement. 

Forecast spend needs

Utilizing your business spend management software effectively to predict spending by category can be incredibly beneficial. Not only will it allow you to evaluate your future cash requirements, but it will also provide valuable insights into potential cost-saving opportunities. For example, you could discover that at certain periods of the year, you have an increase in your spending behavior or that for some holidays your budget gets a reduction. 

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Monitoring and reporting 

If you continuously keep track of how your spending matches your budget, your company can respond swiftly to any discrepancies or changes. This proactive approach helps businesses remain aligned with their financial objectives and can make necessary adjustments in real-time

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Why Spend Management is Important?

It saves money

Yes! This is what you come for, right? Spend management can lead to substantial cost reductions. How? Because it analyzes spending patterns, helping you to pinpoint unnecessary expenses and obtain better prices, allowing you to reallocate resources to the right places. 

Financial control 

Give it a thought, if you are aware of your spending habits as a company, then you can monitor your level of expenses according to the budget assigned, making sure that you don’t run into overspending. 

Risk mitigation

By implementing strict controls over spending, businesses can significantly reduce the risk of fraud, compliance violations, and financial mismanagement. Regular reviews and audits can help identify potential risks before they escalate.

Higher efficiency

This becomes more real as you automate your spend management processes, integrating all the steps in a single platform, gives companies the chance to reduce administrative burdens and focus more on making profit. 

Types of spending

Direct spend 

In procurement, we mention direct spending, when we are talking about all those expenses that go into developing a product. Raw materials are an excellent example, but it could also include other items such as secondary components. Let’s put it this way, if you spend money buying something fundamental for your production chain, then you can consider it as part of direct spend. 

Indirect spend

This is the other part of the puzzle, as it includes all the spending on goods and services that while not related to creating the final product, are vital to maintain your business operations running. 

Spend Management vs Budgeting

When it comes to financial management, overseeing your spending is probably as important as having a solid comprehension of the limits of your budget. However, spend management shouldn’t be confused with budgeting. 

As we have seen, spend management focuses on constantly monitoring your company’s expenditure in order to have a better understanding of the ways you can save money. 

Budgeting on the other hand is a process that works to develop a plan for future income and expenses over a specific period. You can see it as a money-centered map that will help you to allocate resources in the best way possible, to achieve strategic objectives. The budgeting process often involves setting financial goals, forecasting revenues, and estimating costs across different departments.

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Spend Management vs Expense Management

While the term expense management can ring some similarities with spend management, after all, it’s all about spending right? There are some key differences to bear in mind. Yes, expense management deals with money allocation as well, but it has a special focus: Employees. 

In brief, expense management is a process designed to track and manage employee expenses, like travel, meals, and reimbursements. You’ll do that by collecting receipts, submitting expense reports, and making sure everything aligns with company policies.

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Spend Management vs Spend Analysis 

If we were to differentiate spend management from spend analysis, we could say that spend management needs to be understood as the action that comes from the analysis. Remember that spend analysis is the procedure that’s carried out by reviewing  historical spending data to gain insights into spending patterns and behaviors

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What to Look out for when Analyzing Spend?

Data accuracy

Remember the first step in the process? Collect data, but to make sure that you are doing it right, you want not just random data, but accurate, precise, up-to-date information. To help you with this, consider relying on an automated solution. Inaccurate data can lead to poor decision-making.

Trends and patterns

Yes, you’ll need data as the basis of the analysis, but that’s not the end of the story,  data without context won’t make too much sense so look for spending trends over time. Are there specific months or categories where spending spikes? Understanding these patterns can help in future forecasting and budgeting.

Category breakdown

You have the data and you have spotted some interesting patterns. What’s next? Analyze spending by category to identify areas where costs can be reduced. By dividing your spending into categories, you’ll be able to  understand where most money is going and where there might be room for negotiation.

Supplier performance

And speaking about negotiation, keeping an eye on your supplier’s performance is always a wise practice. You can do this by looking at costs, delivery times, and quality of goods/services. This analysis can help you decide whether it’s time to diversify your supplier network or not. 

Employee expenses

Another important point, that’s often overlooked: staff expenses 

Review employee spending, particularly in areas like travel and entertainment. Are these expenses aligned with company policies? Identifying discrepancies can lead to better compliance and reduced costs.

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The Relationship Between Spend Management and Procurement

Better sourcing opportunities

If you are aware of which suppliers are the most cost-effective and which ones could be better off replaced, you can manage your supply chain with the confidence that you are making the best sourcing decisions for your business. 

Higher efficiency levels

Be honest, wouldn’t be wonderful to see procurement as a straightforward process? Well, spend management or more precisely, spend management software can remove from the equation tedious manual tasks. 

Visibility 

We’ll stick with automation for this one, spend management systems deliver reliable and up-to-date information that helps you make smarter decisions in procurement. With spend analytics, you can enhance your forecasting, minimize unplanned expenses, and take advantage of savings opportunities.

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Risks of Poor Spend Management 

Financial losses 

We have said it before, but let’s highlight it some more if you don’t keep track of your money, you can’t be aware if you are spending too much on unnecessary expenses. This can result in unexpected costs that surpass budgets, putting your financial goals and general operations in a difficult spot. In the long run, these financial losses can be a serious problem for your business’s stability.

Liquidity issues

When a company doesn’t have a clear handle on its spending it might reach a point where it’s unable to cover essential costs like payroll, supplies, or operational expenses. Besides that, there’s the threat of missing out on new business opportunities, whether it’s investing in new or failing to  respond to customer demands.

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The Problem of Manual Spend Management 

At this point, you might be wondering if there’s a difference between manual spend management and one whose process has been automated. 

The short answer is yes.

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Outdated data 

Many companies rely on spending data that is often a month old,  but how the heck can you be sure that the data you manually registered is 100% accurate?  This is one of the many problems manual spend management faces as businesses often struggle to maintain their data accurately. The end result is a mess of confusion about which pieces of information are necessary for decision-making related to spending and which are less relevant.

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Absence of real-time visibility 

Following the above point manual spend management doesn’t have a way to keep updated records of financial data in real time. So if your company spent money on something that perhaps wasn’t within the budget, you won’t find out until it’s too late.

Multiple tools 

Did you know that even with manual spend management software is still used? Not one, not two, but many. Instead of using an integrated platform, teams rely on multiple solutions to handle the data manually- Unfortunately, this can lead to data mishandling and an increase in errors.  And for businesses, mistakes mean financial losses. 

It consumes a lot of time 

If you have to spend hours or days going through countless rows of data just to be sure that nothing important is missed, if you don’t know with certainty about where is your company spending its money and on top of that you have to use a bunch of software solutions to try to keep a track of everything, then you can be sure that you are wasting considerable amounts of time. 

Now, that sounds just terrible, so why not try out a better approach and automate your spend management? 

Benefits of Automation for Spend Management 

Accuracy

Yes, that word again, accuracy. One of the most attractive reasons to adopt automation is that it reduces the possibility of making mistakes. Just like we saw a moment ago the challenges that come with manual data entry can lead to inaccurate financial reports and misguided spending decisions. Automation eliminates much of this guesswork by capturing and processing data with precision. This way you won’t have to worry if your financial reports are reliable or not.

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Better supplier rates

Let’s say that your company has a clear understanding of its current spending and knows exactly where it’s spending more money than it should with some suppliers. What would be the next logical step?  Implement strategic sourcing and supplier evaluation, so you can negotiate more adequate rates and diversify your supplier network without losing sight of quality. Automation can provide you with the necessary insights to do that. 

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Real-time insights 

And speaking about insights, automation provides real-time visibility into spending patterns. With automated spend management systems, your team  can access up-to-date data instantly, allowing them to identify trends and any possible issues the moment they happen. 

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Efficient process 

Managing time across various operations can drain energy and resources from businesses that could be better utilized in more relevant projects. However, with automated spend management, you can reduce the effort required to handle multiple things while still accomplishing the same goals in less time. This means that your company can operate without worries knowing that it’s becoming more efficient than before. 

Smart budgeting 

Yes, yes, budgeting and spend management might not be the same, but that doesn’t mean that they aren’t connected. Automated systems allow for historical data analysis and trend forecasting, making it easier to create budgets that align with actual spending patterns. This leads to more effective financial planning and helps you allocate resources right where they should be. 

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How to Optimize Spend Management?

Strategic sourcing 

Improving your relationships with suppliers is one of the simplest yet most effective ways to reduce costs and have higher levels of profitability. You can do this by gathering data on the contracts and suppliers your company currently relies on for goods and services. Apply some filters to your search to create a list of the suppliers that could use some room for improvement and another that meets your expectations. That way you can select the best suppliers for your business. 

Set a clear spending strategy 

The first step in developing a successful spend management strategy is to set up clear guidelines and boundaries for spending activities within your organization.

These spending rules don’t need to be overly complex;  the simpler they are, the easier will be to understand them and follow them.  Here are some common areas to define:

• Where and how buyers can make small purchases: For example, specify whether they can buy through a curated catalog or from an approved vendor list.
• Who is authorized to create and submit purchase orders: Clearly outline which team members have the authority to make these decisions.
• What thresholds exist for purchases: Establish guidelines regarding purchase limits and the corresponding approval process based on specific criteria. 

Establish an approval workflow 

After establishing how spending should take place, it’s important to implement consistent workflows for getting purchases approved. Depending on the nature of the purchase or the size of the company, you might need approval from various departments.

Having clear and simple processes in place builds a foundation for a more effective and time-saving culture. 

Analyze spend

Once you have gathered and organized all the data related to your spending behavior you can use this information to create accurate forecasts, develop a better budgeting strategy  and improve performance.

Automation

Implementing spend management and procurement software can significantly lighten the workload for your procurement, accounts payable, and finance teams. Automation streamlines the procure-to-pay process, eliminating the need for manual handling. This not only helps you save on labor costs but also reduces errors. 

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