Just like scheduling a visit to the doctor for a wellness check can evoke anticipation and dread (because, let's face it, no one looks forward to being poked and prodded), examining the health of your spend management program can stir up similar feelings. You might wonder, "Will it hurt?" or "What if we find something wrong?" But fear not - today we’re identifying the critical checks every business can painlessly incorporate into their spend management review process.
Think of neglecting your business's spend management program as like a patient avoiding their annual check-up. Your spend management program has been functioning, but is it at peak health? Could there be underlying conditions affecting its performance that you should be aware of? Just like you can't ignore your health and hope for the best, your spend management program needs regular examinations to ensure it's operating efficiently. Today, we will play financial physician and explore the vital signs and metrics that indicate a healthy spend management program. I promise it won't hurt a bit.
Understanding Spend Management
At its core, spend management involves managing and optimizing a company's employee-initiated expenditures. Think of it as every dollar that leaves the organization outside of payroll - whether it be on an expense report or an invoice. It encompasses all aspects of employee-initiated spending, from the initial planning stages to the final payment and analysis of those expenses. Effective spend management programs provide a holistic view of all company spending, allowing for better decision-making and strategic financial planning.
Successful spend management is not just about cutting costs; it's about spending wisely. Effective spending means investing in the right areas, negotiating better terms with suppliers, and ensuring that every dollar spent contributes to the company's overall goals and objectives. Efficient procurement processes, effective compliance measures, cost savings, and optimal allocation of resources characterize a healthy spend management program.
By understanding the fundamentals of spend management, businesses can begin to assess the health of their program and identify improvement areas. Let’s dig into the key metrics crucial in evaluating the efficacy of spend management efforts.
Core Metrics for Evaluating Spend Management Efficacy
Ensuring the health of your spend management program will require you to monitor several key performance indicators (KPIs) closely. I like to think these exercises (pun intended) fall into two categories: cost savings/avoidance and compliance. These metrics not only provide insights into current performance, but also highlight areas for improvement.
1. Cost Savings/Avoidance
One of the primary goals of any spend management program is to reduce costs and prevent unnecessary expenditures. Measure cost savings by comparing current spending levels against previous periods or benchmarks. Trends are even easier to identify when you break them out by job function, expense type, or department. Cost avoidance, on the other hand, can be trickier to quantify, but is equally important. It involves identifying actions taken to prevent potential future expenses, such as negotiating better contract terms to avoid price increases, or ensuring as much spend as possible goes on a company credit card, so you can capture the rebate.
Examples of this include:
- YoY spend by department/expense type/payment method
- Credit card adoption
- Avg cost of air/hotel/car
- Add in payment type to monitor if there is a trend of overspending when OOP methods are used
- YoY spend by vendor
- Spend by MCC (Merchant Category Code) rather than the user-inputted expense type
2. Compliance
A best-practice spend management program requires adherence to established policies and contract terms. Compliance rates can be measured by the percentage of purchases made through approved suppliers or within negotiated contracts for vendor purchases. Define aging buckets that make sense for your business and the payment format, then group invoices and expenses into those categories to determine what needs immediate attention.
Leveraging a corporate credit card program is a great way to ensure your business has a trusted source of data feeding into the system for expenses, and has the added benefit of garnering a rebate. Use this data to determine your credit card adoption rate and target your top 10 cash spenders to issue a company card to or reinforce policy if spending is out of compliance. Use the rules engine of your tech stack to ensure compliance flags and automatic declines are incorporated into your workflow, then use this data to determine what percentage of past and current spending is compliant. Are the results indicative of a need for more end-user training, or should you evaluate the effectiveness of your policy? High compliance rates indicate that employees follow your spend guidelines, which helps control costs and reduce risk.
- Return rate of expenses
- Percentage of policy violations
- Top cash spenders
- Workflow cycle times and aging
Continuous Improvement and Adaptation
A static spend management program is unlikely to remain effective over time. Continuous improvement and adaptation to changing business needs and market conditions are essential. This involves regularly reviewing spend management practices, incorporating stakeholder feedback, and being willing to adjust strategies and processes as necessary. Encourage a culture of financial responsibility and ensure that spend management goals are aligned with broader organizational objectives. By regularly checking the efficacy of your spend management program through the lens of your business's key metrics, you can support its financial health and long-term business success.
Remember, a healthy spend management program saves money, supports strategic business objectives, enhances operational efficiency, and fosters sustainable growth. Learn how Harvard Business Review recommends finance teams revolutionize the use of automation to control spend and drive profitability.