Spend Management

Updated on April 4, 2024
Article byRutan Bhattacharyya
Edited byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Spend Management?

Spend management refers to a process carried out by organizations to manage their schedule, costs, procurement efforts, and supply chain quality. This strategic sourcing and comprehensive procurement procedure aims to minimize vendor risk and optimize quality, costs, and performance in terms of profit and revenue.

Spend Management

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The practices and procedures that are part of the process ensure that a business engages in efficient purchasing and makes smart procurement decisions. The process can be informal or formal, depending on an organization’s size. Moreover, it may involve various approval points and stakeholders. Note that this process primarily has a couple of categories — operational and financial.

Key Takeaways

  • Spend management refers to a process that involves managing company purchasing and supplier relationships to spot every expense and make the most of the amount. It allows organizations to monitor, manage, analyze, and optimize organization-wide spending to improve revenue and profit.
  • A key difference between the spend and expense management is that the latter is a narrower term and a part of the former.
  • Financial and operational are two categories of this process.
  • Spend management can help in managing risk and reducing supply costs.

Spend Management Explained

Spend management refers to a process in a business that involves analyzing spend categories and supplier transaction data, negotiating discounts, managing the supply chain, setting spending limits, and analyzing the results. Note that this process requires competitive bids and involves assessing the suppliers to qualify the transaction data. Through this process, businesses try to manage their supply base and purchases holistically, reduce risks, maximize value, and allow for the best overall ownership cost.

The spend management process involves the following steps:

  • Identify Business Expenses – Business expenses can be of various types; they can range from sales commissions to research and development (R&D) expenses.
  • Centralize The Spend Data Within An Automated System – This step involves choosing the most comprehensive and advanced automated software system for managing the spend management process. On must ensure to integrate that system with procurement software they use.
  • Clean And Verify The Spend Data For Analysis – Next, clean and verify the spend data to ensure accuracy and eliminate the possibility of formatting differences, missing data, or duplications.
  • Group And Categorize The Data – Categorize the spending data based on the expenditure type. After figuring out the categories, allow the spend management system to automate the task.
  • Formulate A Strategy Concerning Spend Management – This step involves businesses creating a strategy to reach all the spend management program goals. Typically, organizations use software systems, policies, and processes as tactics to attain the objectives of streamlining negotiation goals and optimizing vendor selection.
  • Make Predictions Regarding The Spend To Enhance Results – Lastly, businesses must utilize their spend management software to predict their spending by segment or category. This will allow organizations to evaluate their future cash requirements. Moreover, it will enable them to get useful insights into opportunities concerning cost savings.
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Categories

The following are the two categories of corporate spend management:

  1. Operational: It focuses on inventory levels and management procurement processes, ensuring services and products are available when required.
  2. Financial: It focuses on monitoring and managing the organization’s spending across all departments.  

Examples

Let us look at a few examples of spend management examples to understand the concept better.

Example #1

Suppose the top-level managers of Company ABC identified maverick spending in the multiple departments of the organization. They began to utilize software to streamline the purchase process for different items and eliminate the existing issue. The software ensured efficient spend management through the automation and integration of spend analytics, sourcing, invoices, and procurement. As a result, the company’s costs decreased, and profits increased. 

Example #2

A leader in the FinTech space, CapitalOS, completed a funding round, raising $39 million in November 2023. The organization specializing in embedded solutions for business-to-business (B2B) platforms has an innovative approach. It allows smaller organizations to harness the advantages of efficient spend management. With the acquired funds, the company can democratize spend management software, which is historically a tool that is reserved for enterprise and mid-market companies.

The U.S.-based company’s technology will enable platforms to incorporate the spend management process seamlessly. This integration will enable the organizations to stand out, improve user retention, and add new revenue streams.

How To Improve?

Businesses can take the following measures to improve this process:

  • Identify the sources of expenses encompassing both indirect and direct spending. The identification process involves accumulating purchase orders, supplier payment data, supplier invoices, and goods receipts. 
  • Establish guardrails and guidelines for spending activities in the organization.
  • Standardize the approval procedure.
  • Monitor and analyze the spending.

In addition, use automation to digitize the procure-to-pay process. This minimizes the possibility of errors and reduces costs.

Some other steps businesses can take include —

  • Carry out audits regularly.
  • Take the help of a spend management tool or solution.
  • Identify key performance indicators (KPIs).   

Importance

One can understand the importance of corporate spend management by going through the points below:

  • The process increases efficiency.
  • It reduces risks and lowers supply costs.
  • This process facilitates more effective collaboration.
  • It helps identify the levers that can help organizations minimize costs and increase long-term success probability.
  • It enhances productivity.
  • If the process is effective, it can improve a business’s cash flow stability.
  • It helps organizations by providing transparency, which, in turn, enables them to manage bottlenecks and spot trends.

Lastly, the visibility of spending data improves because of this process.

Spend Management vs Expense Management

The concepts of the spend and expense management can be confusing for individuals new to the world of business. To completely understand their meaning and objective and avoid confusion, one can look at their key differences. Hence, let us look at the distinct features highlighted below.

Spend ManagementExpense Management
This term is broader as it deals with controlling the total expenses of an organization.It is a narrower term that deals particularly with the spending of individual employees.
This process has two categories — operational and financial.It does not have any such category.
The process aims to mitigate vendor risk and improve the overall business performance.It aims to establish control over employees’ spending in an organization.

Frequently Asked Questions (FAQs)

What are the biggest challenges of spend management?

Some key challenges of this process are as follows:

– The process of aggregating spending data can consume a lot of time. – Categorizing the expenses can be a challenge.
– It can lead to increased costs if there is no established system that tracks the expenses.
Additionally, teams may not know what expectations they must fulfill if purchasing policies are adopted or communicated poorly.

How to choose spend management software?

Let us look at the following features to choose the right software:

– Ability to moderate on-and-pre-trip travel expenses
– Audit enablement features
– Cloud-based platform
– Integration with accounting and enterprise resource planning or ERP software
– Credit card integration
– Petty cash management
– Artificial intelligence and automation

Can spend management enhance supply chain resilience?

Yes, this process can improve the resilience of the supply chain through —
– Mitigation of supply chain risks
– Optimization of `spending to reduce costs
– Identification of alternative suppliers to minimize dependence on one source only

This article has been a guide to what is Spend Management. We compare it with expense management & explain its categories, examples, and how to improve it. You may also take a look at the useful articles below –

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