Spend management

Overview of Spend Management Systems

A spend management system is used to reduce the total expenditures of a business. This is primarily a cost-reduction system, but when properly managed, will still ensure that an appropriate amount is spent on the core activities of an organization. The system contains the following main features:

  • Aggregates information about expenditures made
  • Sorts the aggregated information in many ways for reporting purposes, such as by commodity type, business unit, and supplier

The information generated by a spend management system is then the basis for negotiations with suppliers to cut prices. In addition, the more advanced spend management systems can track the terms of supplier contracts, and even contain electronic supplier catalogs that employees use to order goods only from suppliers approved by the purchasing department.

How to Emulate a Spend Management System

Despite these advantages, a spend management system is out of reach for many smaller organizations, since it costs a minimum of $1 million. If you want to develop a low-cost spend management system, here are several suggestions for cobbling together an in-house alternative:

  • Exception reporting. Run a report that aggregates purchases by supplier, and match this report against the company's approved supplier list. This focuses attention on maverick spenders, who can be tracked down and informed about why purchases are being concentrated with just a few suppliers to gain volume discounts.
  • Impose penalties. If maverick spenders continue to not use preferred suppliers, charge their department managers an in-house penalty for each such occurrence.
  • Use supplier credit cards. Obtain credit cards from preferred suppliers, and issue them to employees. Since these cards only work for purchases made from the issuing suppliers, this tends to focus spending.
  • Restrict procurement cards. See if the operator of the company's procurement card program will restrict their use to purchases made with preferred suppliers. The cards will not function for purchases made with anyone else.
  • Enforce contract approval. Require that all supplier contracts be countersigned by a senior corporate manager. Doing so allows this person to repudiate contracts with suppliers that are not on the preferred supplier list.
  • Expand the chart of accounts. Add more detail to the chart of accounts, so that expenses are tracked not just in aggregate, but also by department, and also by expense type within each department. For example, travel costs could be tracked by airfare, hotel charges, auto travel, and incidentals for each department. This gives the company better insight into exactly where expenses are being incurred. However, an excessive level of chart of accounts detail can make life difficult for the accounts payable staff, which must record this information.

These suggestions will not emulate a real spend management system, but can provide some portions of the functionality of such a system. The greater level of control and reporting provided by these changes can lead to a reduction in company expenditures.