You have to spend money to make money — every entrepreneur in history has heard those words, and they are no less true in 2022 than they were hundreds of years ago. Businesses don’t operate for free; they need to acquire supplies, pay employees, advertise and perform other costly duties that allow their products to end up in the hands of paying customers.
In the 21st century, a new field of business has developed to help business leaders better understand where their money is going, where it should be going and why. This field is called spend management, and here’s what those in business need to know about it today.
What Is Spend Management?
Spend management is the process of monitoring, controlling and analyzing the manner in which a business spends money. The process often involves a range of supplier procurement activities, such as product development, category management, supplier management and inventory management. Usually, the goal of spend management is to maximize value from company spend, to decrease costs, to mitigate financial risk and to improve supplier relationships.
Spend management is often performed by the procurement team, who has direct control over suppliers and spend, but various stakeholders internal and external to a business are impacted by spend management. Thus, it benefits business leaders to work with the procurement team to develop a strong and successful spend management strategy to align with budgetary needs, profitability objectives and more.
Because spend management integrates so many aspects of a business — to include the complex and critical procurement and supply chain processes — it is remarkably difficult to administer manually. Most companies take advantage of digital spend management solutions, which provide them more minute control over their finances.
Why Does Spend Management Matter?
Spend management matters because it could be the difference between business success and business failure. Companies live and die by their cash flow; business leaders who have the tools to identify where their organization is losing money and where they can optimize spending are more likely to have healthy cash flows that contribute to lower risk and greater growth.
Proper spend management has the potential to affect every stakeholder within a business, from the procurement team to customers to suppliers to c-suite executives. Some noteworthy advantages of sound spend management strategies include:
- More spend visibility. Seeing a company’s spend allows leaders to make more insightful decisions.
- Better management of risk. Knowing more about spend-related processes helps leaders identify and navigate risk factors.
- Better sourcing. Using mapped costs, procurement can identify the suppliers with the best value.
- Greater process efficiency. Relying on spend management software eliminates time-intensive manual processes.
Just as good spend management provides benefits to essentially every member of a company, bad spend strategies have the potential to impact everyone — and a lack of strategy is just as detrimental as strategies that do not suit a business’s objectives. The sooner business leaders work with their procurement teams to find the right spend management tools and tactics, the better.
How Should You Build a Spend Management Strategy?
No two businesses boast the exact same spend management solutions and strategies because no two businesses have the same spend management needs. Business leaders and procurement teams should work together to consider their options and forge spending plans that make sense.
Some processes often involved in sound spend management strategies include:
- Source-to-pay: identifying, selecting, negotiating and contracting with suppliers before paying for products or services.
- Procure-to-pay: skipping sourcing and focusing on procuring goods and services before paying for them.
- Source-to-contract: sourcing products or services from vendors then contracting with the vendors with the best price quotes.
- Procure-to-invoice: procuring goods and services before suppliers send invoices to accounts receivable.
- Invoice-to-pay: receiving invoices from suppliers in accounts receivable and dispensing payment.
Once business leaders and procurement teams have considered the most important processes in their spend management strategy, they can work toward finding solutions that keep these processes affordable and orderly. In 2022, spend management could mean the difference between a profitable supply chain and a wasteful one, so business leaders need to commit to building a spend management strategy that works.
