Building a successful business empire is highly dependent on how a business manages or controls its spending. Spending is a critical part of business expansion and growth, but it can lead to financial instability when overdone. For this reason, businesses need to have adequate spend control measures in place to check how their money goes out and what it is spent on.
To effectively manage the outgoing funds, the business needs to have the right spend control methods and tools in place. These should allow for real-time monitoring of expenses, data collection, and optimization of budgets procurement. Simply put, spend control entails having a spend management solution with guidelines, policies, and rules like budgets for timely and cost-effective spending.
The first step towards implementing an efficient spend control strategy is adopting automated purchase-to-pay software. This system comes equipped with built-in spend control tools, freeing up business time that manual processes would otherwise take up. Such systems give the much-needed visibility of the money that comes in, where it goes, and who spends it.
This article will explore spending control and why it is vital for business success.
What is Spend Control?
Spend control, also known as spend management, entails the management and monitoring of a business’ outgoings. It is a method that finance professionals use to control the spending habits of budget holders in a company by monitoring purchases and supplier relationships to maximize spending and minimize wastage.
Some people misperceive spend control to only relate to the reduction of costs. Rather, it is about discretionary spending by ensuring that every expense is approved and adhered to as per the budgets set as spending is essential for growth.
Do I Really Need Spend Control? Here’s Why Spend Control is Important
A good number of businesses have no clear idea about how their money is spent. This is despite the fact that failure to control spending on some key processes like business travel, procurement and supplier relations, online payments and subscriptions, and ad hoc expenses can have costly repercussions on the business.
While this lack of control may fail to grab their attention when the cash flow is good, it can turn into a real nightmare when the business encounters cash flow problems. Cash flow challenges is what saw most businesses struggle the most through the Covid-19 pandemic, as highlighted by CFO Connect.
Spend management is a way for businesses to ensure that their expenses fit within the budget. Financial controllers have an obligation to record and report all the monies that come in and go out of the business. Failure to have proper control in how a business spends has a negative impact on various elements like:
- Financial planning
When a business doesn’t have its spending forecasts clearly laid out, it becomes very hard to set any meaningful objectives or even create and enforce budgets. CFOs and FP&A personnel rely on accurate data to create sound budgets and avoid scenarios where teams end up with an underfunded budget that holds them back, or excessive budgets resulting in overspending.
- Human error
The chances of making errors when the documentation process is manual are very high, compared to when the business has an automated spend control system in place. Some people simply don’t want to deal with the paperwork, or unintentionally miss errors in the paperwork that can result in serious financial and tax issues. Automation of expense processes streamlines the processes and nips most of the errors in the bud.
- Time management
Without proper spend control, it means the business’ financial data isn’t readily available. This makes the administration work very challenging and time-consuming. The financial team has to deal with incomplete data from expenses to approvals, leaving gaps that are challenging to fill and no real control on the spending.
- Fraud protection
Poor spending management makes it easy for employees to commit fraud by falsifying financial documents and passing them as expense reports. A study by Business Wire shows that up to 10% of US employees admit to falsifying documents and stealing as much as $25,000 per year. Sometimes the employees aren’t malicious, they simply forget the expense details and end up giving rough estimates.
- Long-term stability
It becomes a challenge for a business to work on its long-term stability when it doesn’t have any proper spending control measures in place. It is very possible to lose future growth opportunities when a company has no visibility on its spending. When a business has its spend controls in place, in the end, it will have sound finance processes and practices necessary to stay in business in the long haul.
Bad Budgeting Example:
Some businesses issue employees with corporate credit and debit cards for official business spending. Some employees may use them at times to cover personal expenses, either with the intention of paying back the money, or not. Where the business doesn’t have the proper budgeting and spend control systems in place, such employees may at times decide to zip up about the expenses and not bother to pay back the money.
When no one is bothered to ask where and what the money was spent on, the uncontrolled spending can snowball, bringing the entire organization down. Dynamic spend controls should clearly determine what employees can spend on and also ensure only what’s needed and approved gets ordered and paid for.
5 Benefits of Spend Control
1. Full Data visibility
One of the biggest considerations of having a spend control system in place is the ability to have real-time visibility of all business payments. With an automated system, finance professionals are well aware of all spending activities, allowing them to have full control of spending in real-time. Full data visibility makes it possible to analyze and compare expenditure with the approved budgets, and it is easier to see how each individual and department is managing the company’s expenditure.
2. Identify Maverick Spending
When employees are left to work without any pre-established corporate structures in place, it gives them a leeway to spend at will. They purchase from unvetted suppliers without any regard to price comparisons or contract agreements, resulting in deliberate unapproved spending. Maverick spending can put a business’ cash flow in a vulnerable position
3. Enhanced Risk Management
The best way to minimize risks in business operations is by identifying them and taking the right steps towards correcting them before they become a problem. With a spend control system in place, it is possible to analyze supplier contracts, performance scorecards, and supply market trends to help you identify potential risks and minimize the business’ exposure to them.
With fraud being a major risk concern in business, the finance team can use spend control software to catch fraudulent invoices, ensure purchase approval processes are followed, keep track of each vendor’s details, and ensure internal policies, as well as external audit compliance requirements, are adhered to.
4. Real-time Financial Data Capture
An automated spend control software collects and categorizes business spend data before presenting it to the finance teams in real-time and in a digestible way. When the decision-makers have data on the company spending activity in real-time, it gives them a single source of truth. The company can perform a spend analysis to see how money is spent across the company and be able to control spending in real-time too.
This data also equips decision-makers with data necessary for making smarter smart decisions on future business spending.
5. Operational Efficiency
Time is a valuable currency in business. For the procurement and finance teams, automation of spend processes helps lower cycle time, eliminate duplication of purchases and payments, allow for timely payments, and provide full visibility across the procurement process. A spend management software contributes directly to a better bottom line in business.
Clear spend policies reduce bottlenecks, making it easier for the employees to make purchase orders and get approvals quickly if they are within the company spend policy and budget. This clear control and visibility on the procurement process and spending make it easier to spot errors early enough and avoid costly financial repercussions.
6. Drive Better Decision Making
Insights provided by automated spend control software have a level of functionality and details needed by the company’s executives to perform valuable, real-time spend analysis decisions. The executives need these insights to forecast the spend scenarios, benchmark performance, identify spend data trends, discover untapped cost savings to increase profitability, and allocate finances effectively to scale up business operations.
Insights from a spend control system help leaders understand business spending in relation to business operations, helping them make better business decisions and in a timely way.
Final Thoughts
Spend control is essential in a forward-thinking business. The platform unites different business departments and stakeholders with the spending responsibility for improved efficiency in business operations. These real-time spend tools and analytics are needed to not only help a business stay in control of its spending but also drive its growth.