Spend Management: Definition, Benefits, Examples and Best Practices

In today's business environment, where cost control has gained significant importance, spend management emerges as a crucial compass for optimizing expenses and boosting financial visibility. By effectively implementing spend management strategies, you can ensure judicious spending and maximize savings. A significant portion of potential savings, up to 15%, is often lost by companies in their tail spend. However, with the right techniques in place, you can steer clear of this costly mistake and pave the way for financial success.

Understanding Spend Management

Spend management encompasses a set of practices aimed at carefully managing a company's expenditures. It involves various processes used to control spending, including budgeting and forecasting future expenditures, tracking expenses and analyzing costs according to industry standards, managing vendors and negotiating contracts effectively, approving purchases, and maintaining strong control over costs.

Benefits of Spend Management

Effective spend management can improve a company's financial health and operational efficiency in several ways. Nowadays, companies are increasingly willing to invest in spend optimization and automation. Here are some benefits of spend management:

Improve your bottom line

Efficient spend management can enhance your bottom line and increase cash flow, enabling you to invest more in other areas like marketing and research. Strong cash flow is crucial for the financial health of your business, particularly considering the high-interest rates associated with borrowing money for funding.

Track and manage expenses

Maintaining a tight grip on spending allows you to stay on top of your finances and forecast costs effectively. By practicing good spend management, you can plan for the future and make informed decisions based on your financial data.

Prevent overpayments and fraudulent payments

Spend management helps prevent fraudulent spending by reducing the likelihood of overcharging and paying for unused services. It ensures that you only pay for what you truly need, saving you from unnecessary expenses.

Implementing Spend Management in Your Company

To effectively manage spend, you should begin by managing your entire procure-to-pay process. This can be done by establishing a well-planned strategy and setting specific targets. Set performance metrics and benchmarks to track the effectiveness of your strategy.

In addition, leveraging spend management software, such as ClearTech, can greatly assist in keeping track of spending. These tools provide deep spend insights and visibility into vendor spends. They help identify unused licenses, and areas of overspending and offer benchmark rates for cost comparison. With automated approval workflows, spend management software allows you to streamline spend and provide real-time data for informed decision-making.

Best Practices for Effective Spend Management

Optimize your spend management efforts by following these best practices:

Create and update expense policies

An effective spend management strategy requires compliance and clarity from everyone involved in the process. Since most employees of a company make company-related purchases, having comprehensive expense policies can help you manage spend better. 

Expense policies contain details about the type of expense an employee can incur, like the maximum spend amount, type of purchase, and the process to claim reimbursement for any expense. 

Setting up expense policies ensures employee compliance and more control over your spend. A good expense policy ensures that employees understand expense workflows and helps streamline your spend effectively. 

Have strong approval workflows

Creating a strong approval workflow for the entire procure-to-pay process also lets you watch your spend better. Having a standardized approval workflow allows you to streamline your workflow and reduce errors. It also creates accountability and transparency across the organization. 

Some Accounts Payable software, like ClearTech, lets you set up automated workflows for bill and payment approvals. Automated approval workflows, like those provided by ClearTech, can help you expedite and track your entire approval workflow, with smart approval to payment workflows. 

Conduct regular internal audits

Conducting regular audits is an essential part of effective spend management. Regular audits help you identify and correct errors made by the employees or finance teams in time. 

Regular audits also help you determine cost-saving areas and establish KPIs and spend-optimizing opportunities. With a strong view of your spend, you can better plan for future spends and devise a suitable spend management plan which works for your organization. 

To ensure a successful audit, take care to categorize your spend well and maintain a clean and deducible database for the auditors. Proper categorization of spend also helps you have visibility of cost-saving areas and reduces the data cleanup and categorization time spent during the audit, expediting the process. 

Get an effective spend management tool 

Investing in an effective tool for spend management will help you streamline your spend while cutting down on manual tasks and related errors. A good spend management tool helps you comprehensively optimize your entire process from procure to pay, is easy to use, and lets you manage your entire workflow on one platform. 

For example, ClearTech digitizes and captures your invoice details, lets you approve your invoices, and pay your vendor through a single platform while syncing it back to your ERP. Its smart spend insights let you optimize spend and reduce costs and track duplicate or uncontracted spend. 

ClearTech lets you approve invoices directly via email and Slack, reducing time and increasing efficiency. 

Foster good vendor relationships 

Maintaining a good vendor relationship is important for a healthy cash flow. 

Fostering a good vendor relationship constitutes establishing good and regular means of communication, paying bills on time and flexibly, and hosting respectful negotiation discussions. 

Keeping a good track of and effectively maintaining contracts is also greatly imperative. Good relationships and contracts can help you get better deals during personal or global economic distress. It also helps you earn payment or volume discounts on these services, and more slack during unavoidable late payments. 

Identify the correct vendors

A correct vendor will provide great quality goods and services at an economical price. You can select the best vendor for your business based on availability, location, price, usage, and quality of services or goods. 

You also need to keep track of the utilization of these services and the quantity of utilization to ensure you aren’t paying for services that you don’t require. This can be done by considering the number of similar services being derived from multiple vendors and switching to the most cost-effective one, as well as switching your current vendors to a more economical option. 

Make use of spend analytics

Performing regular analytics on your spend can help identify areas of overspending and solve them. It can help you identify overspending trends, uncover errors and identify improvement opportunities. It can also help you forecast future spends and plan ahead of time. 

McKinsey’s article “The Role of spend analytics in the next normal” mentions how spend analytics can help you not only track spend across your organization but also highlight supply-market exposure. With supplier and risk analysis in the mix, spend management can also help you select vendors and negotiate better deals. 

Examples of Successful Spend Management

Here are two examples showcasing successful spend management initiatives:

How an Indian SaaS giant saved 6.5% on their annual AP spend with ClearTech:

A rapidly growing SaaS giant in India was overspending on their budgets, with their spend increasing at a 40% YoY rate compared to a revenue growth of only 20% YoY. By implementing regular spend management initiatives and conducting a spend audit, they identified payments of over $30,000 to vendors for unused services. Through careful vendor analysis and informed negotiation, they saved 2.3% of their total spend. Additionally, improved cost center accounting and strict approval policies helped identify $300,000 worth of spend made after contract periods.

How one of the biggest ice cream manufacturers in India identified contractual leakages with ClearTech:

After implementing ClearTech’s spend management system, a major ice cream manufacturer in India discovered leakages in their spending. They realized they had been overcharged by vendors, resulting in bills worth $400,000. Utilizing multiple vendors for the same goods was costing them 1% of their total spend, and an additional 1% was being overcharged on invoices. The company shifted to a single, cost-effective vendor and implemented appropriate cost centers, effectively reducing costs.

By adopting effective spend management practices, businesses can optimize their finances, control costs, and improve their overall financial health and operational efficiency. With more and more businesses looking to optimize costs, spend management provides an apt answer. 

Common spend management mistakes to avoid

While it is essential to follow proper spend management techniques, it is equally important to avoid common mistakes that can negatively impact your company's financial health. 

Lack of Automation

Opting out of automating your processes may inadvertently result in financial losses. Manual processes are prone to errors and consume valuable time. Moreover, the lack of visibility associated with manual processes hampers cost-saving opportunities.

Decentralized Data

Centralizing your spend data plays a crucial role in creating visibility within your finance team. With decentralized data, knowledge becomes limited within the organization, leading to unnecessary spending and duplicate services, ultimately causing financial loss.

Limited Expense Tracking

Neglecting to track petty cash and other small expenses due to their relatively low amounts may seem convenient in the short term. However, over time, these seemingly insignificant spends can accumulate into substantial losses and potential duplicate spending. It is important to track all expenses meticulously to ensure optimal spend management.

Challenges of spend management

Introducing spend management into your company from scratch can indeed present a set of formidable challenges. Let's explore some common hurdles that organizations often encounter while implementing spend management functions:

Cleaning and Aggregating Spend Data:

Effective spend management relies on having data in a comprehensive and concise format. However, cleaning and aggregating data, particularly when dealing with complex manual data entry, can be an arduous and time-consuming task. This process may strain the bandwidth of your data analysts and require considerable effort to ensure accuracy.

Categorizing Expenditures:

Categorizing expenditures can pose a complex challenge during the initial stages of implementing spend management. It necessitates a thorough understanding of your business units and departments, as well as the ability to strategically budget and categorize expenses to uncover potential spend-saving opportunities. This task requires careful consideration and skillful navigation of various spending categories.

Lack of Communication:

Effective spend management involves coordination across different departments and business functions. However, differences in data management or accounting practices for the same expenses among various departments can create challenges when aggregating data. Clear communication and alignment among teams are crucial to ensure accurate and consistent data aggregation.

FAQs

What is the difference between budgeting and spend management?

Budgeting is the practice of allocating resources and setting financial goals for different departments or areas. It involves creating a financial plan that outlines expected income and expenses over a specific period. On the other hand, spend management refers to a set of ongoing practices aimed at monitoring and controlling costs to ensure spending remains within the allocated budget. It entails tracking actual expenses and implementing strategies to reduce spending where possible.

Is spend management automation the right choice for my business?

Spend management automation can be highly beneficial for your business, especially if controlling costs is a priority and your business is scaling with complex operations or higher spending volumes. By implementing spend management automation, you can eliminate manual processes, optimize financial functions, and gain better control over costs. It streamlines your spend management practices and allows for more efficient resource allocation.

How does spend management improve procurement?

Spend management plays a crucial role in improving procurement processes. It involves implementing strategic sourcing procedures to ensure you procure goods or services from compliant vendors and at competitive rates. By effectively managing spend, you can avoid overspending on merchandise and maximize the value you receive for your money. Additionally, spend management ensures compliance with business standards and guidelines throughout the procurement process.

What is spend management software?

Spend management software refers to specialized software designed to assist businesses in effectively managing and controlling their expenses. It streamlines the entire spend management process, ranging from procuring goods and services to invoice approval, vendor management, and payment processing. With spend management software, you can automate and streamline various financial tasks, enabling better visibility, efficiency, and control over your spending activities.