Spending is necessary to run a business. But how you spend is a whole other question.
So many of the costs businesses feel like necessities. How do you operate if you don’t have the space, equipment, software, and inputs necessary to keep things going strong?
It might make you feel powerless and like you don’t have control over your costs. If this hits close to home, you need to start thinking about your spend under management and how to improve it.
Definition of spend under management
Spend under management (SUM) is the portion of the business’s total spend that is run through a procurement function and thus overseen by the finance team.
It’s sometimes used interchangeably with “spend under procurement,” though this depends on the business’s procurement practices.
Businesses use this metric to understand how much of their spending is “managed” through a formal process. The more that spending is managed, the more the business is in control of where its money is going.
Why spend under management matters
When trying to optimize your bottom line, every dollar counts. You need to start thinking about purchasing versus procurement and how each influences your spending habits.
Spend under management is a metric that helps you understand how many of your costs are being controlled through a procurement process.
Having a low spend under management metric means your business is vulnerable to unverified expenses that eat away at profits.
But if you invest in improving your spend under management, you’ll unlock:
- Improved spend visibility
- Greater insight into spending trends and practices
- More compliance with corporate expense policies
- Cost savings on unnecessary spending
How to calculate spend under management
To calculate your spend under management, you need the following numbers ready:
- Total spend through managed procurement processes: Any spending that is managed by the procurement department
- Total organizational spend: Any spending that can be controlled through a procurement process (also called addressable spend). This typically means costs that are procured from vendors where the business has alternatives that can impact business results.
Once you have these numbers, you have a simple division equation to generate the metric:
Spend under management can be presented as a percentage by multiplying the result by 100, or left in its decimal form. For example, if the output is 0.65 that means that 65% of your total organizational spend is being managed by a procurement process.
How to optimize spend under management
With an understanding of what spend under management is and how it’s calculated, let’s get into some actionable steps you can take to optimize it.
Categorize spend between direct and indirect
There are two types of procurement: direct and indirect.
Direct procurement involves the costs that are essential to providing your goods or services. For example, a coffee roaster has the direct costs of coffee beans and packaging, both of which are necessary to sell a bag of coffee to a consumer.
Indirect procurement involves all other costs that are associated with your operations. That same coffee roaster has costs that are necessary to keep the business operational like an HR software or equipment used in the process.
The importance of making this distinction is how you treat these costs.
Direct procurement is necessary and difficult to adjust. Your focus for direct costs should be on cultivating solid relationships with vendors to keep getting delivered the goods you need reliably so you can keep selling.
Indirect procurement covers costs that are easier to change. Because of that, you should have more control over these costs and monitor them for savings opportunities regularly.
Revisit your procurement practices
The essential qualities that determine your spend under management are your procurement process and policies.
Slow and taxing manual processes are costly because of how they take up peoples’ time. These costs will make teams second guess whether something warrants going through the procurement process or not.
Even worse, if that pipeline gets clogged with requests, any lack of attention to speed up the process results in purchases being approved when they shouldn’t be.
If you want to improve your spend under management, you have to put in the work to optimize your procurement process so it runs efficiently and can manage all of the tasks being run through it.
Leverage technology
Efficiency is at the heart of spend under management: the more efficient of a process you have, the greater the capacity to run transactions through the procurement process.
One method of improving your efficiency is to adopt a new technology that wins back time otherwise spent on manual processes and admin work.
Automated procurement management platforms keep submissions running smoothly through the pipeline. They ping reviewers when a submission is ready, keeps communication centralized, and provide in-depth breakdowns of timelines and trends.
Look for an option that integrates with your current tech stack to keep data running smoothly from platform to platform and keep information centralized.
Making the switch to a platform that automates your accounts payable (like BILL) helps you save time, reduce errors, and get a deeper understanding of your procurement process—all of which improves your spend under management.
Common spend under management challenges
Every business has unique processes that affect the spend under management challenges they face. However, you’ll likely experience one of these common challenges.
Lack of clear data
Understanding your spend under management can only come if you have a clear understanding of your spending.
The two components of the equation are your total spend through procurement and total addressable spend. If you don’t have clear data on these two categories, you won’t get an accurate calculation of your spend under management.
To get the information you need will often mean going to different platforms and tallying up multiple numbers, a fragmented process that is prone to errors.
To address this, you need to invest in your data infrastructure. Whether it’s adjusting how you’re using the tools you already have or bringing on new tools, you need a clear understanding of what is and isn’t going through a procurement process before you work on improving your spend under management.
Resistance to change
Increasing your spend under management means adjusting the processes you already have in place.
In some cases, the process in place is too frictionless. Without sufficient checkpoints, you risk maverick spending from employees a little too happy to charge something to the business.
Switching to a process with more friction will help you manage your spending, but that friction comes at the cost of your employee’s time and effort spent getting expenses approved. There could be resistance if they don’t like that trade-off.
The best way to combat this is to adjust the process to minimize the impact on your employees. For example, using procurement cards (P-cards) and virtual cards give you control over spending without the work that clogs up procurement pipelines with requests.
No evaluation of current suppliers
Your suppliers have more of an impact on your spend under management than you might think. Their practices impact your spend visibility and they need to be willing to work with you given the changes you’re hoping to implement.
Maybe they take a payment method that’s difficult to track like cash or check. Or they have long turnaround times that leave your data and transaction history incomplete when you need it most.
It’s common for businesses to regularly evaluate their suppliers. When doing these evaluations, it’s important to think about all the ways they impact your operations, not just from a financial standpoint.
If working with a certain supplier is giving you incomplete or outdated data, it might be time to make a switch.
How to increase spend under management
Breaking down the spend under management equation, the one factor businesses have complete control over is how much spending is being run through a procurement process. If you want to increase spend under management, you need to run more purchases through a procurement process.
This might feel easier said than done, but there are actionable tactics that make it more approachable.
Follow these steps to start increasing your spend under management:
- Categorize what organizational costs are and aren’t currently being purchased through a procurement process
- Communicate and collaborate with teams to find out what would be required to change the process for those expenses
- Streamline the procurement process or implement new technology that helps you save time on procurement tasks
- Continue to touch base with affected teams to address pain points and make the process easier for everyone involved
Using technology to improve your spend management
If you want to improve your spend management, you should be thinking about centralization and efficiency: keep spending data in one spot for reference and process requests faster.
BILL Spend & Expense can help you do both. Using integrations with top accounting software, transactions flow seamlessly into customizable reporting that packs value and helps you find meaningful insights.
See for yourself how we save users an average of 12 hours a month and help them make data-driven decisions that save money. Reach out to get started.
