A thriving business surely has a good handle on managing its spending. Being fully aware of company costs, budgeting and planning, and forecasting are each an important and vital part of ensuring the most strategic business decisions are made. It allows for the opportunity to scale and provides a solid foundation for future growth. Keeping spend under management is a part of this strategy, but it often gets confused with different spend or expense management definitions.
We’ll explore the true definition of spend under management so teams can have a unified understanding of this goal and the processes required to achieve it.
What is Spend Under Management?
Spend under management (SUM) is most often referred to as the portion of business spend that is overseen and managed by the procurement function. But it’s a little more complex than that. It can be calculated as the total amount of company spending (including direct and indirect spend) that is managed by the procurement department, divided by the total organizational spend (also called addressable spending). Total organizational spend does not include paying employees’ salaries or tax payments). When calculating for the same time period, you’ll get a percentage which is your total SUM for that period.
Some organizations consider SUM to be the same as spend under procurement, but it really depends on what policies and practices the business has in place that influence the defined terms to go by.
Other commonly used terms to understand include spend under contract, which is the amount of spend being managed under contract with a supplier, which would also usually fall into the spend under procurement category.
What Spend Under Management is Not
SUM as a value is often incorrectly used interchangeably with the terms above, and can be confused with other industry terms too.
We mentioned that addressable spend is all organizational spending regardless of the type. But what is spend under influencing? Spend under influence is the portion of spend that the procurement function influences by controlling the sourcing or supplier process, with specific strategic procurement policies, contracts, etc.
To make more sense of the variation of terms floating around out there, it’s extremely important for each individual team or department to agree on a definition, as well as what policies affect these definitions, and implement them within the larger organization. That way, there will be a unified understanding of the different parameters your business is working with, and it will be far easier and effective in the long term to enact a strategic spend mananegment practice.
How Can You Increase Spending Under Management?
Every organization will benefit from bringing more spend under management. More spend managed equates to more visibility and less maverick spend trickling out unnoticed. Even with the best intentions and spend management processes in place, mismanaged spend happens and can cancel out the benefits your management processes have afforded you.
Consider Your Processes
When determining where you can better address purchasing to be able to bring more spend under management, you have to go back to the source. What purchasing process or processes do you already have in place? Slow or clunky purchase approval processes can lead to limited visibility, requests (purchase approvals) being approved when they shouldn’t be, or duplicate requests being submitted and approved. Those extra unnecessary purchases are simply money spent in excess.
What are your current company policies and practices shaping these processes that might be holding you back? Are you using category management to make your procurement process more efficient and to identify areas for savings? Understanding the foundation of your spend culture can help you establish a more streamlined process, and once you get stakeholder buy-in you can implement it company-wide.
That streamlined process will produce greater visibility. This byproduct is extremely important – you need to know just what you’re spending, and on what, in order to manage spend properly. Improved spend visibility can come from being aware of common spend categories, or what types of goods or services your team is purchasing, and with which suppliers.
Monitor how long a standard approval flow takes and pay attention to where things may be getting stuck or falling through the cracks. Purchases that are lost or unaccounted for end up contributing to unnecessary maverick spend, or resurface later as surprise invoices making things more difficult between accounts payable and procurement departments. More visibility also contributes to better data. Only once you are able to see the full picture, will you be able to conduct proper spend analysis measures.
Focus On Your Suppliers
Investing in better supplier management practices can have a big impact on company spending. Is it currently easy for your team to manage the suppliers you work with? How is your process for onboarding new suppliers? Ensuring your business is working with trustworthy suppliers who have a quick turn around keeps prices lower, there’s more compliance and less risk, and issuing payment is more organized.
Many companies partake in the strategic practice of conducting regular evaluations of commercial suppliers. This investment in supplier tracking gives you the opportunity to monitor quality and performance, mitigate risk, encourage continued improvement, and access better quality of data from your preferred suppliers.
Look To Technology
Every organization can benefit from a bit of technological assistance. Have you considered adopting an automated procurement tool for better cost management, organization, and visibility? Simpler purchase requests are more time efficient, get seen by the right approvers faster, and contribute to smarter, ultimately more managed spending. An automated system can also help you easily implement newly established processes or tools that will allow you to define unified company metrics for measuring spend.
Spend under management as an effective practice will also make the AP function’s work go more smoothly, there will be greater synchronicity between the procurement and accounts payable teams.
Bring Team Members On Board
Getting your employees on the same page is a big part of the process. Take the time to get them involved in any upgrades you make to your spend management practices, whether that means training sessions or teaching opportunities. A little effort in the beginning will be worth ensuring they have a real understanding of the importance of taking steps to bring spend under management.
Whether it’s a newly automated solution or new ways to create checks and balances within the finance and accounting processes, be transparent and give employees what they need to carry out purchasing and spend management efforts to the best of their ability.
Taking measures to bring more of your business spend under management will pay off in greater visibility, more understanding of purchasing habits, and ultimately, cost savings. The way your organization’s spend is conducted, measured, and monitored, greatly influences overall organizational performance – so you want to be sure key stakeholders are on the same page and working in a unified way towards your goals.