People often simplify spend management down to the notion of expense-tracking within a budget. While budgeting is certainly a key part, a true spend management strategy allows businesses to further optimize their spending in order to save money and become more efficient amid department needs and internal changes. In this article, we'll discuss what spend management is, why it's important, and how you can go about implementing it. We'll also cover some best practices for getting the most out of your spend management strategy.

What is spend management?

Spend management describes the process of organizing and controlling company expenses. This can include strategies for tracking spending, creating budgets, and reducing costs. With spend management, businesses can budget and assess expenditures before they happen. You’re empowered to make better financial decisions, adapt financial strategies in real-time, and eliminate overages at the end of the month.

Why is it important?

Spend management is crucial for a variety of reasons. Through incisive reporting, spend management can help you save money over time by boosting business profitability and reducing cash leakage. Further, spend management strengthens your relationships with suppliers by promoting transparency and trust. By communicating guidelines to suppliers, you can foster positive and collaborative relationships.

Spend management vs. expense management

Spend management and expense management are two very different practices. One is proactive, and the other is retroactive, but both are important. Spend management includes all methods and practices of tracking and controlling company spending – it is the proactive branch of the financial management sector of a company. Proactive spend management can include anything from creating a budget, for example, to selecting software to track spending in a way that aligns to your business model.

Expense management, on the other hand, is a retroactive component of the financials. Expense management is the procedure businesses use to handle, pay, and audit employee expenses. Typically this includes tracking what employees spent and why, and who authorized the spending. For example, when employees pay for business-related items out of their own pockets, a good expense management system will ensure they are paid in full and in a timely manner.

The spend management process

You can break down the spend management process into five steps: plan, track, analyze, categorize and control.

1. Plan: Plan how much money the company wants to spend on different items or services. Ask the question: What’s most important? From there, create the budget and determine where money will flow. 

2. Track: Track actual expenses against the planned budget. Regular tracking—oftent through spend management software—helps you identify areas where the business may be overspending or underspending, and adjust accordingly. 

3. Analyze: Analyze the spending data you collected in the previous steps. Study spending trends, identify areas of waste, and look for opportunities to save money. By understanding where the company is spending money, you can make better decisions about where to allocate resources.

4. Categorize: As a business grows, it will incur a number of costs, including recurring non-recurring. When you categorize your spending, you can better understand the business’ expenses to get ahead of budgeting and forecasting, as well as make strategic decisions about where to allocate resources. When you know which costs are fixed and which are variable, you can better predict future expenses and make adjustments when necessary.

5. Control: The final step is to control spending by adopting policies and procedures that will ensure expenses stay within budget. This may include setting limits on purchase card usage or requiring pre-approval for large purchases. By implementing these controls, you can ensure the business is not overspending on unnecessary items or services from vendors. A good way to get ahead of spending control is to pay vendors with virtual credit cards.

By consolidating spend data into a single platform, businesses can more easily identify opportunities for cost savings. Finance teams can spend less time managing expenses and more time strategizing about how to grow the business. Finally, spend management can also help businesses improve their overall efficiency.

Common challenges of spend management

In order to effectively manage spend, businesses must overcome a number of common challenges. These include:

• Spending across multiple departments: Without an effective system in place, it can be difficult to track spending by department or category. Different types of spending (e.g., IT services and supplier payments) are often tracked by different, incompatible systems.The result can be data silos that make it difficult to find important information. ‍
• Disorganized spending: There are likely different team members responsible for spending in different divisions. This can make it hard to figure out how much money everyone is spending and on what. As a result, departments may buy items not knowing their counterparts are in need of the same resource—a classic example of unnecessary overspending.‍
• Restricting spend: In some cases, you have to restrict spending without limiting productivity. This can be hard to do if you don’t have  an effective system in place. Employees might not know what they are allowed to spend and on what. Businesses that use spending management solutions can enforce policies, set credit card parameters, and prompt requests to approve purchases in advance.
• Human error: There is a greater chance of mistakes when you have a lot of manual processes. Employees and finance teams can enter spend data incorrectly. Streamlining processes and automating as many of them as possible can reduce the likelihood of this happening.

Improving spend management processes

1. Get your technology in line. There are a variety of software applications that help businesses track and manage spending. These applications automate many tasks, provide real-time insights into spending trends, and provide recommendations for reducing costs.

2. Tap into employee education. Teach employees about proper budgeting and financial planning techniques, and provide them with guidelines for appropriate and inappropriate spending. Issue a virtual credit card for employees to not only empower them to move forward with budgeted projects, but protect the company at the same time. 

3. Finally, recognize that departments are out of touch with each other; it’s the nature of any growing company. So, what’s another way to improve spend management? Get the departments talking in clear and regular communication streams—whether through in-person meetings or perhaps a visible Slack, Teams, or another virtual channel. Start (or re-start) with a clear understanding of each department's budget and spending priorities. You’ll inevitably find overlaps in spending goals and budgetary needs, and you’ll be able to align on objectives in the years ahead.

Contact Extend

Spend management strategy done right improves processes and eases cash flow management for everyone involved. Gain real-time visibility and control over team spending with a dedicated software tool on your side. Contact Extend today to learn if our services are a fit for your business needs.