59 percent of budget managers spend before their budget is approved, according to new industry data. Consequently, half of budget managers went over budget by 40 percent or more, and more than half went over budget before they even had their budget. Needless to say, it can be tricky to manage business spending.
These statistics are unsurprising given that eight out of 10 budget owners believe spend management is too challenging, and 94 percent of them track their spend in a separate system outside of finance.
No matter what industry you operate in, every finance team has the same goal: to control organizational spend, reduce costs, and improve profitability.
But deploying streamlined spend management processes that build a proactive spend culture is no easy feat. It requires cross-departmental buy-in, the right technology, and a lot of forward planning.
Here’s what you need to know about spend management for high-growth organizations, and how controlling maverick spend, bridging the gap between finance and operations, and deploying the right technology is your best chance of improving profitability.
- Rogue spending: the finance team’s arch nemesis
- The rogue marketer: a team prone to overspend
- For the Chief Marketing Officer, what really matters?
- Integrating finance and operations for greater clarity
- Why a smart spend culture is important for high-growth organizations
- Selecting the right spend management software
- Making the business case for spend management
- How the right software can make a difference
Rogue spending (also known as maverick spend) includes all expenses from purchases made outside of agreed contracts and pre-approved amounts. It also contains purchases that don’t align to an organization’s spend policy or spend culture, and purchases that don’t contribute to organizational growth.
The basic factors determining whether spend is considered maverick or not include:
- Understanding the gross and net burn rates (and the return on investment)
- Determining the priority on short-term profitability
- Knowing the impact spend has on long-term growth
- The availability of capital
- The transparency behind each purchase
- Whether or not spend aligns to previous purchases of a similar nature
For organizations growing in size, rogue spending can quickly become unmanageable. This is due in part to a rise in transactions and vendors, and the complexity that comes with managing this. Paired with an ever-growing list of new team members who may not understand an organization’s spend culture, this type of spending can quickly create an expensive leak that impedes growth.
For the most part, rogue spending often happens because organizations run into growth opportunities that require immediate spending. This makes forward planning and budget control a difficult exercise for finance teams and often leaves them managing spend requests after capital is committed.
Marketing is a great example of a team prone to rogue spending and cumbersome spend management practices. With multiple expenses occurring across multiple spend categories (like recurring spend, fixed spend, ad-hoc spend, and so on), it’s easy for marketing teams to lose control of spend and end up repeatedly over budget.
To compound the challenge, marketing also demands rapid purchase approvals and adequate budget flexibility so the team members can remain open and responsive to change. Without the right spend management controls in place, then, rogue spending is all too easy.
Organizations that lack expensive overheads – like e-commerce marketplaces and technology organizations – often reinvest a large portion of capital back into marketing and sales to drive growth. Consequently, these organization-critical teams often receive the majority of available budget compared to, say, internal departments like human resources or legal.
During times of rapid growth, these teams are working at maximum output. For finance teams, that can be cause for concern. Without the right controls or systems in place, understanding key metrics like burn rate, cost of customer acquisition (CAC), and customer lifetime value (CLV) is almost impossible. And these data points are key measures of success. For example, knowing your CAC helps an organization determine how much money is spent to acquire new customers, while CLV helps determine how much money a single customer spends during their customer lifetime.
If your organization’s CLV is lower than your CAC, that’s a red flag. What’s even more of a red flag is lacking this knowledge altogether.
For the Chief Marketing Officer, understanding these metrics and measuring them against departmental outgoings is critical to the success of the team. Without this information, it becomes difficult to build a scalable marketing strategy that contributes to rapid growth. The key to uncovering and interpreting this data, however, lies outside of the marketing department.
In many cases, finance and operations teams fail to align on the wider strategic goals. Instead, these teams often work in silos and focus on achieving separate key performance indicators (KPIs). What’s more, it’s even trickier to align the rest of the organization to core KPIs. While many operations managers will understand and interpret a profit and loss statement, things can get complicated while considering deeper reporting metrics. Although these financial reports are primarily beneficial to finance and leadership teams, operations leaders still need to understand them. This helps them make smart choices about things like operational efficiency and cost control.
For finance leaders, then, finding ways to present key metrics to operations leaders in a clear way is key to smart spend management. A few ways to do this include:
- Creating a single source of truth: standardize financial reports so that everyone receives data in the same format.
- Offering clarity: provide variance between actual and budgeted numbers is critical.
- Providing operation-specific metrics: break down operations-relevant data by team so operations leaders understand the effectiveness of each function.
Since financial data contains useful insights that are critical for operational leaders, it’s important to build a close feedback loop between these two teams to ensure complete transparency and to enable strategic and informed decision making. With this, an organization can implement the necessary spend controls and can effectively forecast for rapid growth.
A good example
One common disconnect found in many organizations is between sales incentive programs and operational performance. For example, a sales team will measure performance in terms of revenue. A finance team, however, measures performance based on profitability. If the sales team offers large discounts, this can create financial pressure and lead to tension.
If sales people are incentivized based on profit margins, however, their decisions on discounts and deals will fall in line with the organization’s primary objectives: profitability and growth. However, without access to these key metrics, setting organization-aligned goals for teams like sales and marketing is almost impossible.
For high-growth organizations who have a limited runway before they need to raise more money from investors, finding a way to deliver real-time and accurate key metrics across the organization is critical to success.
Here’s the bottom line: finance leaders need access to operational data to accurately forecast financial results. Operations leaders need access to financial data to understand the impact that organizational change has on efficiency.
Organizations invest so much in sales and marketing to secure revenue. They have systems and processes to track money coming in because it’s an investment into growth. However, without someone actively designing a proactive spend management process that clearly identifies how money leaves your organization, you could end up with a leaky wallet.
Building a proactive and visible spend management process has three fundamental benefits to any high-growth organization:
- Spend is captured: one of the initial difficulties that prevents transparency around organizational spending is capturing the data in the first place. What’s more, the ability to capture the context around spending doesn’t exist without a standard process flowing into a system of record.
- Spend is controlled: many organizations rely on verbal and email approvals for purchase requests, or scramble to approve payment at the invoice level. A proactive spend culture shifts the controls further up the stream to the requisition level. Controlling spend further upstream ensures internal checkpoints are set so everyone makes informed decisions.
- Spend is visible: when organizations can capture and control spend as it happens, they can also report and make better decisions in real-time. Categorizing spend will unlock areas for cost savings, allow for consolidation of vendors, and even support confident decision making to invest further into growth.
Of course, building a process that enables capture, control, and visibility requires the right software.
Spend management software can really change the game for everyone at an organization. It can democratize the purchasing process, create efficiency for finance and AP teams, and provide in-depth financial forecasting for leadership teams. And it is these core things that contribute to rapid growth.
However, finding the right technology isn’t as simple as a ‘quick Google’. It requires some serious deliberation and input from multiple stakeholders to ensure your organization chooses a solution that’s right for your culture, your model, and that aligns to your growth targets.
When it comes to choosing a spend management vendor, there are a few considerations to make:
1. Define your requirements
First things first: it’s critical to define what you want your procurement software to do. Are you looking for a simple expense management solution? Or do you require an all-in-one platform that makes it easy to request, approve, procure, and receive your goods and services?
2. Scout the market
Once you understand the functionality you require, look at the market to see what’s out there.
3. Shortlist and deep dive
After your preliminary research, it’s time to shortlist vendors. Select four or five top tools that stand out from the pack and use this as your launchpad for further research.
Our advice? Reach out to these solutions directly and ask the questions you can’t find answers for online. Consider watching a demo of the product and having an expert show you around each purchasing tool.
Armed with this, you can begin to really understand how each procurement platform works, and which one will benefit you most.
4. Reach out to your network to find out more
The most trustworthy reviews come from those you trust. It’s as simple as that.
If you’re still undecided on which spend management solution to use, reach out to your networks and ask around. The more opinions you gather, the better chance you have of making an informed decision. Also, make sure to check out customer testimonials and case studies available on vendor websites.
5. Consider cost
Hopefully by now, you’ve narrowed down your spend management vendors to just one or two solutions.
The next questions to ask are:
- Does it meet your budget?
- What are the setup costs?
- What’s the cost of licenses?
- Does the platform operate in the cloud?
Further to this, you might want to consider factors like implementation times and available integrations into your existing tech stack.
6. Finally, put it to a vote
Last but definitely not least, put it to a vote. Get your stakeholders together and debate each tool until you have a consensus.
Not only will a consensus help with buy-in from the rest of the company, it’ll also speed up things like adoption times and change management. These are important factors to consider when implementing any new technology.
Building a spend management strategy can do much more than free up time and reduce costs across an organization. It can create the building blocks for an informed and proactive strategic partnership that serves the needs of all internal customers and accounts for all (and we mean all) spending. Of course, to do this you must build the framework for continuous data analysis. But, with outmoded tools, a lack of integration, and cumbersome data access, this isn’t possible. Manual ordering and invoice approvals just don’t cut it for operations and finance functions that genuinely want to gain influence and improve profitability.
Instead, executives must give procurement teams the resources they need to build a spend management framework that can proactively influence spending decisions before they are made, not after. This means putting internal functions like operations temporarily ahead of sales, marketing, product development, customer engagement, and business intelligence when it comes to resource allocation. It also means ensuring procurement teams work in collaboration with other departments to ensure all cross-functional spending is accurately tracked. This allows you to do things like build effective spend management workflows. It also allows you to pick apart metrics such as supplier delivery times so you can optimize for vendor performance.
Effective contract management and supplier profiling should also be afforded by a digital system. As for the basics, a good software solution should accelerate and automate key process steps such as purchasing management. Rest assured, the right spend management tools, processes, procedures, and professionals will pay for themselves, very quickly.
High-growth organizations usually find it difficult to keep up with fast-growing demand for purchases, vendors, total invoices, and new team members. Meanwhile, growing problems arise in accounts payable including duplicate payments, paying for fraudulent invoices, late payment fees, automatic recurring subscriptions that aren’t used, and so on. Consequently, there’s a pressing need for an integrated spend management solution that’s easy-to-use and requires no training.
An effective spend management software will enable leadership teams to manage organizational spending in smarter ways. With the help of the right software, managers can know for sure that spending is within budget. They can also avoid any uncertainties that can create problems later. Comparing actual spend to budgeted spend is one key requirement here. This is also true of real-time reporting, which helps leaders make more informed decisions.
Ultimately, smart spend management software – in all of these ways and many more – will help high-growth organizations effectively manage their bottom line and improve long-term value for investors.
Procurify has managed over $18 billion dollars of organizational spend around the world. Our platform integrates with major ERP accounting systems such as NetSuite and QuickBooks Online. If you’d like to find out more about how Procurify works, click the link below and watch a demo.