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What is Spend Management? Importance, Benefits & Process

Vlad Falin

November 14, 2022

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Key Takeaways

In the realm of business operations, effective spend management is crucial for maintaining a healthy financial bottom line. Businesses grappling with inefficient spending control face risks that can substantially impact their financial stability. 

For example, poor invoicing practices that cause a delay in payment can lead to contract management issues or, even worse, a lost client for your business. It also might cause issues with some of your preferred suppliers if they feel they’re not being paid on time. 

Making a slip-up that disrupts a subscription can mean your company lacks access to critical software or tools until the issue is fixed.

A poor expense report system means charges incurred on your business trip might result in many follow-up questions, so your accounts payable team is on the same page with purchase orders. A system without real-time visibility for spending data is not ideal for any organization and does not make it easy to reduce spend.

Intelligent spend management helps prevent these issues. A business uses spend management to comprehensively track and review organizational-wide spending and purchase orders down to the last dirham. 

In this post we will deep dive into spend management and discuss the best ways to properly manage it. 

What is spend management?

Spend management refers to the systematic process of tracking, analyzing, and controlling an organization's total expenditure. It encompasses all aspects of business spending, including invoicing, contract management, subscription services, and expense reporting. 

The goal of spend management is to enhance financial stability by providing real-time visibility into all financial transactions and purchase orders. This comprehensive approach enables businesses to identify inefficiencies, reduce unnecessary expenses, and maintain strong relationships with suppliers and clients.

The Importance Of Spend Management

Effective spend management is crucial for a company's financial health and operational efficiency. Neglecting careful expenditure tracking or allowing excessive indirect spending can lead to significant revenue loss, risking even the most well-planned business strategies. Managing costs and enhancing efficiency becomes challenging when financial processes are time-intensive and complex.

A report by McKinsey highlights the critical nature of this issue, noting that external spending on suppliers typically represents 40-80% of a company's total expenses. This statistic underscores the vital importance of meticulous spending control. Furthermore, the process of reviewing and optimizing expenditures can have a substantial impact on employee workloads, indicating the far-reaching effects of spend management.

Adopting robust spend management practices enables companies to achieve greater financial stability and avert potential crises. Implementing a system that tracks and monitors all financial transactions ensures that expenditures are fully accounted for, reducing the likelihood of wastage. In summary, efficient spend management is not just about cost control; it is a strategic approach that influences every aspect of a company's operations and contributes significantly to its long-term success.

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Advantages Of Digital Spend Management

In this day and age, using an online tool to keep track of your expenses should be a no-brainer. Let’s have a look at some of the main advantages.

1. Insight Into Everyday Expenditures 

Where is every dirham your company makes going? If you don’t know, digital spend management will dramatically strengthen financial accountability, budgeting, and expenses. In addition, reporting on where company funds are flowing makes it much simpler to see how different department heads oversee budgets. Read more on how to improve internal control over financial reporting.

2. Stronger Financial Controls 

Spend management tools like Pluto, allow you to not only monitor your spending in real-time but also set the limits on the go. In addition to that you can issue cards for departments or individuals, and even focus them on a particular type of usage, such as specific vendors only. 

spend management

3. Budget optimization 

Effective spend management is a great solution to ensure a better-looking budget. Analyzing and managing spending makes it simple to find and cancel unneeded services, negotiate lower prices with new supplier contracts, and never have to pay a late fee again. It will also significantly help your board of directors as they’ll have a simplified, streamlined budget to review and discuss at the start of the year. 

Common Spend Management Challenges 

It’s easy to pursue spend management practices that hurt your business’s bottom line if you’re not careful. Many ‘traditional’ best practices might not fit companies with remote-first work policies, engage in cutting-edge industries, or have an unorthodox structure.

If your company has a dynamic structure, spend management becomes all the more important to help you keep up with the competition and get the most value out of every dirham spent. 

Keep these potential challenges in mind as you pursue spend management practices. 

1. Relying On Old Spending Data

Be wary of relying on old budgets or financial data when managing more spend. It’s challenging for leadership to identify problem areas with cash inflows or outflows, when they only have outdated information.

2. Over reliance On Manual Mapping 

Having to go back at the end of the month to match spending to budgets manually can take an inordinate amount of hours and opens the door to errors and mistakes that can throw off a spend management policy. 

Pluto helps to automatically match spend to budgets in real-time, ensuring accounting and finance teams have accurate updates. 

3. Harnessing Too Much Technology

Modern financial software can dramatically help your company’s day-to-day operational flow. However, if these solutions do not work together, chaos can ensue which leads to data migration and processing errors. Pluto integrates with your accounting tools, cutting the data flow time significantly. 

4. Outdated Processes

The post-COVID world of remote and digital work means your employees might be scattered across the globe and in different time zones. Having to arrange shared corporate cards manually or coordinate team spending with employees in different locations can be tricky. Pluto offers unlimited virtual cards, which allow you to provide a payment channel for any employee anywhere in the world. 

spend management challenges

How To Improve Your Spend Management Process

Optimizing your spend management process might seem tricky at first glance. Fortunately, small and large businesses often rely on the same core strategies to optimize spending. 

1. Rely On Spend Management Software: Pluto can help automatically track expenses, keep abreast of budgeting, and help manage strategic sourcing. CEOs and CFOs then have relevant, real-time data at their fingertips to see where their company is financially. 

2. Focus On A Few Payment Methods: Do you have too many company cards in your pocket? It might be time to streamline purchasing methods to help simplify your spend management strategy. For example, your business can dramatically improve expense tracking by asking employees to only use company cards for business expenses instead of asking for their personal cards to be reimbursed. 

3. Have An Organized Approval Process: You can clarify your spending process (you might want to check our post on how to create a corporate card policy)  by ensuring employees have a clear hierarchy of how and by whom purchases need to be approved. If your team is unclear, they might complicate the payment process by not filing the right reports, which means your financial team could be left in the dark about purchases. 

6 Efficient Spend Management Strategy Tips

Your company needs to optimize its spend management strategy to ensure the final results lead to reduced procurement costs, improved efficiency, and streamlined workflows. 

Spend management best practices also help improve vendor relationships and communication, procure the optimal goods and services your business needs, and even help you earn volume and early payment discounts due to more effective and simplified financial practices. 

Keep the following steps in mind for the best results regardless of your organization’s industry or size. 

1. Calculate Expenses

Do you know exactly where employees spend company funds? If not, you’ll need to build a comprehensive list of company expenses, suppliers, and entities where funds are going. 

This might quickly become a challenge if you’re in charge of a large business. If so, look to designate specific team members to review employee salaries, utilities, marketing, training, and all other day-to-day expenses to have the most detailed list. 

You can’t improve what you do not measure. You can use Pluto to get a firm grip on your expenses. Pluto allows you to monitor and control your expenses so you clearly see how much was spent in which category. 

2. Confirm Data

You’ll want to ensure all accrued expense data is accurate and can be cross-checked with receipts and inventory records. Ensuring transaction data is precise, and expense lists are free of duplicates, spelling mistakes, and other mistakes makes the entire spend management process more efficient. 

Take this step extremely seriously if your company spend practices have relied on more manual processing methods. Standardization ensures that multiple currencies, formatting differences, and other nuances are accounted for when looking at spend analysis data. 

(Goes without saying that when using Pluto this is all pre-done for you!)

3. Categorize Information

While optimal spend management brings all expenditures under a single umbrella to review, your team will still want to categorize expenses into various groups to make reviewing and making adjustments across different departments simpler. 

It’s usually best to categorize expenses in multiple ways to understand where money is going. Pluto allows you to categorize expenses both through specialized cards or just by tagging, so everything is nicely grouped together when it is review time. 

spend management strategy

4. Review Expenses

A well-thought-out process of calculating, verifying, and categorizing spending information will simplify your entire review process when you’re looking at spend data. 

You should immediately be able to spot expenses that are anomalies or recurring spending that might be able to be cut out from the start. 

Pluto’s dashboard can give you a high level but also a detailed view, so you can clearly identify trends and separate expenses.

5. Devise A Strategy

You’ll want to move decisively once you’ve identified potential changes to spending habits and department budgeting approaches. 

It might seem difficult at first glance to start reducing budgets, cutting out vendors, or make other dramatic changes to your company’s budget and expense habits. Rely on good change management practices and your leadership team to cultivate employee and stakeholder buy-in to any adjustments.

6. Practice Good Data Forecasting

Keep updating your expense data as you make a budget and spending adjustments. Doing so keeps your team on top of where funds are going and can help forecast different spending scenarios and how they might impact your business’s bottom line. 

Keeping data and information updated becomes particularly important if your expenses grow to ensure financial operations run smoothly. Don’t forget to cultivate supplier relationships if you work with different vendors for optimal inventory management.

Should You Rely On Spend Management Software? 

Manually processing expense claims, keeping up with petty cash, and tracking company credit cards can quickly turn inefficient, hinder your company’s financial management, and inhibit the overall procurement process.

In contrast, the right spend analysis solution can aid real-time expense tracking, provide easy-to-read charts and graphs of high-level expenses, and capture and store financial-related documents, so your finance team members are not scrambling to find a receipt or report. 

Pluto has a multitude of features including procurement software and account payable that will help you with spend management and make spend control much easier.

1. Flexibility

Pluto allows you to create cards for various purposes, edit spending limits on the go and monitor your expenses in real time. This allows you to scale up or down depending on what your business needs at any given moment.

2. Powerful Analytics

With Pluto, you will be able to track spending patterns and areas of high expenditure and get real-time insights into your business finances. The powerful analytics will help you make better decisions about where to allocate your resources.

3. Ease Of Use

The main bottleneck of many spend management platforms is that the employees do not use them - as it is just too time-consuming. Not with Pluto!  The sleek and user-friendly interface makes expense management a breeze.

4. Simplified Reimbursements

Receipt upload and reimbursements can be quite a burden for the team. Pluto allows you to take pictures of receipts with your phone and just add them to your reimbursements list. With the use of categories and tags, you will be able to both submit and review them in record time!

Key Takeaways For Company Spending

Spend management remains an essential component of all organizations regardless of size. Accountability for every dirham flowing in and out ensures your company maximizes revenue and remains growth-focused, no matter the budget.

You can take the first step today by relying on Pluto and processes to establish control over budgets, track spending, manage payments, cut costs, and boost your financial team’s day-to-day operations and processes.

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