Effective Spend Management is of crucial importance for companies of every size. It encompasses strategic planning, monitoring, and control of the organization’s expenses to optimize savings, increase efficiency, and enhance profitability.
In today’s rapidly changing business environment, where expenses can quickly spiral out of control, having a comprehensive financial management strategy, namely spend management, is more important than ever. This article is dedicated to the key elements of financial management, specifically spend management, its benefits, and practical tips for implementing effective spend management practices in an organization. Read more How do you stay in control of your company’s finances with budgeting.
📚 Types of spending 📚
Business expenses can be divided into several categories reflecting different areas in which a company incurs costs. Understanding these various types can help companies better manage their expenses and make strategic decisions regarding cost control. Below are some main types of expenses that companies need to pay attention to:
👉 Operational spending: These are expenses related to the day-to-day operations of the company, including employee salaries, office maintenance, marketing, insurance, and other necessary expenses associated with conducting business. Controlling these expenses is essential for maintaining the financial health of the enterprise.
👉 Raw material spending: For companies producing physical products, raw material expenses constitute a significant cost. They include all costs associated with acquiring materials and raw goods necessary for production. Managing these expenses may involve negotiating favorable agreements with Suppliers, tracking raw material deliveries, and minimizing waste.
👉 Office supplies spending: These expenses cover various office supplies such as paper, pens, printer toners, etc. While they may seem insignificant individually, they can quickly accumulate if not managed properly. It’s important to have insight into office supplies expenses and monitor them to avoid waste and control costs.
👉 Employment-related spending: These include all expenses related to employing workers, such as salaries, benefits, recruitment, training, social insurance, additional benefits, etc. Managing these expenses is crucial for maintaining employee satisfaction and ensuring that employment-related costs are appropriately controlled.
👉 Repairs and maintenance spending: These expenses cover any costs related to the repair and maintenance of equipment, vehicles, properties, etc. They pertain to keeping the company’s assets in good physical condition. Managing these expenses is important to avoid costly breakdowns and maintain equipment in optimal working condition.
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💥 Managed vs unmanaged spending💥
Depending on how companies spend their money, spend management can be divided into two categories: managed and unmanaged.
📌 Managed expenses are controlled and supervised by the financial team or procurement department within the company. The spend management process involves determining budgets, creating spending plans, negotiating agreements with Suppliers, and tracking expenses in real-time. Companies can utilize various tools and solutions, such as spend management systems, corporate cards, and expense reporting, to organize and systematize their expenses.
📌 Spend management has many benefits and is essential for effective business operations. Primarily, it allows the company to control costs and make informed decisions about expenses. By overseeing expenses, a company can identify areas for potential savings, such as preferred Suppliers, contract negotiations, or waste reduction opportunities.
📌 Unmanaged expenses refer to expenditures that are uncontrolled or unknown to the company. This may include expenses made on employees’ personal credit cards, illegal or unauthorized expenditures, purchasing office supplies without a plan or negotiation, or acquiring raw materials from non-preferred Suppliers. Unmanaged expenses can lead to waste, excessive costs, and loss of control over the company budget.
📌 Unmanaged expenses pose significant risks to the company. They can lead to financial resource dispersion, uncontrolled cost increases, inefficient resource utilization, and a lack of transparency in the procurement process. Shifting expenditures outside approved procedures can also lead to the company incurring excessive debt and exposing itself to financial risks.
⚡ Direct vs. indirect spending ⚡
Direct and indirect expenses are two main categories of expenditures in the context of spend management. Direct expenses are related to the core business activities, such as purchasing raw materials, materials for production, or services required for service delivery. These expenses are directly associated with the fulfillment of the company’s primary business objectives and are necessary for its operation. For example, in the case of a furniture manufacturing factory, direct expenses may include the purchase of wood, resins, or other materials essential for furniture production.
On the other hand, indirect expenses are associated with supporting and facilitating those primary activities. They include expenses for public services such as electricity, rent, telecommunication services, as well as the purchase of office supplies or office maintenance costs. Although they are not directly tied to the production or sale of products, they are necessary to maintain the smooth operation of the company. Indirect expenses can impact production costs, but they are not part of the product itself.
⚙️ Operating vs. non-operating spending⚙️
Operating expenses are directly linked to the fundamental business operations. They include expenses related to the purchase of raw materials, employee salaries, production and distribution costs, and Customer service. Operating expenses are essential for conducting daily activities and form the basis for revenue generation.
🔧 For example, in the case of a manufacturing company, expenses on raw materials are a key component of operating expenses. Raw materials are necessary for product production, and their cost directly influences the production cost and profit margin.
🔧 Similarly, expenses on employee salaries are also part of operating expenses. Employees are essential for conducting business operations, and their compensation constitutes a significant cost for the company. High salary expenses can impact the company’s profitability and are crucial for maintaining employee satisfaction and motivation.
🔧 Non-operating expenses are not directly tied to the core business operations. They may include interest payments, one-time legal fees, advertising costs, or various fees and contributions. Non-operating expenses are often more related to the overall functioning of the company than its core business.
🔧For example, the interest on a loan or credit is a cost associated with indebtedness. Companies often take out loans or issue bonds to finance investments or ongoing operations. The interest charges related to this debt constitute non-operating expenses because they are not directly tied to revenue generation.
🔧 Another example of non-operating expenses is advertising costs. Advertising is an important marketing tool that helps businesses promote their products and services and acquire new Customers. However, advertising costs are not directly related to the production or distribution of products and are therefore considered non-operating expenses.
⚖️ Fixed costs vs. variable costs ⚖️
In expense management, there is a division between fixed and variable expenses. Fixed costs are typically expenses that are constant and repetitive over a specified period, such as employee salaries or rent. On the other hand, variable expenses are those that fluctuate based on the scale of business activities, such as raw materials or marketing costs.
Fixed expenses are consistently present in the company budget and are independent of the scale of production or sales. They are necessary costs for conducting business that cannot be easily avoided. Fixed expenses tend to remain stable over a specific period and usually do not change significantly from month to month. Examples of fixed expenses may include rent, employee salaries, insurance, or maintenance costs.
Variable expenses, on the other hand, depend on the scale of the company’s operations. They fluctuate with the volume of production or sales. This can include costs of raw materials, packaging, or marketing and advertising costs. Variable expenses are more susceptible to environmental business factors, such as changes in market trends or fluctuations in Customer demand.
⚠️ Spend management vs cost management ⚠️
Spend management and cost management are two key processes in optimizing financial operations and ensuring cost control in a company. Although they are related, they have different goals.
Spend management primarily deals with tracking and controlling individual expenses incurred by employees during their work. This includes managing expense reimbursement policies, expense reports, and invoice processing. The goal of spend management is to streamline the expense reimbursement process, eliminate errors and fraud, and provide financial insight into employee spending patterns. This helps maintain accurate financial documentation and adhere to budget constraints.
Additionally, spend management covers a broader scope. It focuses on managing and controlling all types of company expenses, including both internal and external expenditures. It involves strategic procurement, Supplier agreements, procurement processes, and preferred Suppliers. Spend management aims to optimize costs, generate savings, identify cost-saving opportunities, and make informed decisions based on real-time visibility into company expenses.
Cost management refers to the process of planning, controlling, and monitoring costs associated with running a business or project. It involves analyzing and optimizing expenses to ensure efficient and effective use of resources. On the other hand, spend management specifically focuses on monitoring and controlling individual expenses incurred by the company or project.
Both spend management and cost management are crucial for achieving effective cost control and optimizing financial processes. By implementing effective spend management practices, companies can reduce the risk of misplaced expenses and gain better control over employee spending. Conversely, spend management allows companies to gain insight into all expenses, identify cost-saving opportunities, negotiate better agreements with Suppliers, and ultimately improve the financial health of the company.
💰 Steps to create a spend management system 💰
The development of a spend management system involves a series of steps aimed at building an effective tool for expense optimization in the company. Here is a list of steps to consider when building a spend management system:
1️⃣ Identify goals: Determine the goals you want to achieve with the spend management system. Do you want to increase visibility and control over expenses, identify savings opportunities, or improve procurement processes?
2️⃣ Choose appropriate tools: Analyze available spend management tools and choose ones that best fit your needs. Check if the tools offer features such as expense analysis, contract management, integration with ERP systems, etc.
3️⃣ Identify key components: Identify key components of the spend management system, such as invoice scanning and processing, payment authorization, Supplier management, expense analysis, financial management, etc.
4️⃣ Customize the system to company needs: Customize the spend management system to the unique needs of your company. Configure it according to expense policies and procurement processes applicable in your organization.
5️⃣ System implementation: Provide proper training for employees who will use the spend management system. Ensure that all employees understand how to use the system and adhere to expense policies.
6️⃣ Monitoring and optimization: Regularly monitor the effectiveness of the spend management system. Analyze expense data and identify areas where adjustments and savings can be made.
Building a spend management system requires careful planning and the involvement of the entire organization. Attention to key components, such as tools, customization, implementation, and monitoring, will be crucial for success and the optimization of expense processes in the company.
✅ Benefits of spend management ✅
A spend management system is extremely important for businesses for several reasons. Firstly, it enables better control and visibility over expenses, allowing for more accurate monitoring, analysis, and reporting. This also facilitates the identification of potential savings that can contribute to improving the financial health of the company.
With a spend management system, companies can make more informed decisions. This allows for the analysis and understanding of spending patterns and the identification of areas where cost optimization can be applied. It also provides significant information about Suppliers, enabling informed choices of preferred Suppliers and negotiation of favorable agreements.
Implementing a spend management system also helps to reduce financial risk. Improving procurement processes, eliminating maverick spend practices, and scanning and processing invoices contribute to reducing the chances of errors and abuses. The spend management system also allows for the elimination of complex manual processes, increasing operational efficiency.
Summary
A spend management system is a key tool that supports financial teams in efficiently managing a company’s expenses. It provides real-time visibility and control over expenses, enabling informed decision-making and identifying savings. Additionally, it helps reduce financial risk, eliminates errors and abuses, and improves procurement processes. The implementation of a spend management system is therefore crucial for the success and growth of any business.