What is business spend management?
It’s no secret that businesses are always on the hunt for ways to increase revenue. However, many overlook the benefits of tightening their belts and finding ways to save money. That's where business spend management comes in. It's like a financial detective, ferreting out all the sneaky ways your company spends money and subjecting them to deeper scrutiny.
An increasing number of companies are recognizing the significance of managing their spending, particularly following the pandemic's adverse impact on numerous businesses. According to Fortune Business Insights, the worldwide market for business spend management software is estimated to expand from $18.66 billion in 2022 to $39.05 billion by 2029.
What is Business Spend Management?
Business spend management is a modernized approach to managing a company's expenses and supplier relationships using cloud-based software. In the past, businesses relied on manual methods or basic tools such as spreadsheets to handle their spending needs, but BSM has emerged as a solution to unify and streamline those processes.
With business spend management, businesses can consolidate their sourcing, contracting, purchasing, and supplier management, as well as invoices, employee expenses, and payments into one central repository. This allows businesses to gather and analyze all spending data in one place, enabling them to make informed and strategic spending decisions.
In effect, BSM serves as a "command center" for supplier records and financial control, highlighting mistakes and inefficiencies so that businesses can derive more value from their financial processes and vendor relationships.
Why is Spend Management important?
For companies that aim to drive business growth, spend management is one of the top priorities. Without a clear understanding of expenses, companies may risk running out of cash and facing serious problems.
Spend management systems help to avoid this by eliminating excessive expenditures and reducing expenses, which ultimately drives up a company's profits. By redirecting finances towards business growth and development, organizations can achieve their strategic objectives.
Spend management is important for companies of all sizes and industries as it provides control levers and transparency necessary for efficient business operations. Well-managed expenses provide security and stability to stakeholders.
Spend Management vs. Expense Management
While the terms “spend management” and “expense management” are often used interchangeably, they refer to two different approaches to managing company spending.
Expense management is focused on individual employee spending, such as travel expenses or business lunches. This type of management ensures that employees are reimbursed for work-related items in accordance with company policies. Expense management software is used to register, track, reimburse, and audit employee expenses, making it easier for companies to manage their finances on a micro-level.
On the other hand, spend management takes a broader approach to how, when, and why money is spent in a company. This complex process includes procurement, invoicing, outsourcing, and supply chain management, providing businesses with a big-picture view of their spending. By considering various types of expenses, such as inventory and equipment purchases, software subscriptions, and full-time employee salaries, spend management allows companies to optimize their spending and maximize value on a macro level.
Types of business spends
In the lifecycle of any business, spending is inevitable, and the expenses may range from regular and recurring expenses to occasional or responsive expenditures. Every business expenditure fits into one or the other of the following categories:
- Operating spends refer to ongoing expenses incurred in the regular day-to-day operations of a business. Direct Expenses of Goods or Services Sold (COGS) and other selling, general, and administrative expenses are included in this category. For example, rent, maintenance, payroll, insurance, advertising, marketing, raw materials, and depreciation are all considered operating expenses.
- Non-operating spends, on the other hand, are expenses that are not related to core business operations. Interest charges, taxes, impairment charges, and losses on the disposition of assets fall into this category.
- Fixed spends are expenses that do not vary with an increase or decrease in the number of goods sold or services provided. These expenses must be paid regardless of business activities and are generally indirect expenses that do not relate to the production of goods or services. Office and warehouse rent, full-time employee salaries and benefits are examples of fixed expenses.
- Variable spends are expenses that fluctuate based on how much a company produces or sells. These expenses rise as production increases and fall as production declines. Examples include raw materials, product packaging, business travel expenses, credit card transaction fees, and shipping spends. Wages for seasonal employees, unlike full-time salaries, tend to vary and are therefore variable expenses.
With BSM, each of these categories can be easily tracked and analyzed, enabling businesses to identify ways to cut expenses and operate more efficiently.
Benefits of Spend Management
Spend management is an important aspect of running a successful business, regardless of the size or industry. It provides a level of control and transparency that is crucial for efficient operations. Proper expense management ensures stability and security for stakeholders, and there are numerous benefits to implementing a well-managed system. Some specific advantages include:
- Accurate and centralized financial data is available for spending insights through spend management.
- Real-time spend visibility is another benefit of spend management, reducing maverick spend and improving bottom line and cash flow.
- Processing accounts payable and accounts receivable on time ensures stable cash flow, reducing the need to borrow money.
- Spend management helps identify savings opportunities and protects companies from cash leaks and inefficiencies in the spending process.
- Clear spending policies lead to increased productivity by eliminating inefficiencies and improving sourcing opportunities.
- Spend management can improve risk management by identifying weak spots in procurement and purchasing processes, reducing the probability of risky situations or behaviors occurring.
Challenges to spend management
Effective spend management is crucial for companies to maintain financial stability and improve their bottom line. However, there are various challenges that come with this complex process, including time-consuming data aggregation, complicated categorization of expenditures, and the need to manage relationships with vendors and suppliers. Poor spend management can lead to a variety of negative consequences, including operational disorganization, increased costs, low efficiency, lack of transparency, and poor supply chain management. It's essential for companies to address these issues to ensure that their spend management system is effective and efficient.
- Time-consuming data aggregation
- Organizing data can be tedious and time-consuming
- Selecting the right software can be a challenge
- Complicated categorization of expenditures
- Requires deep understanding of the business structure and department specifics
- Can be exhausting and require significant research
- Managing relationships with vendors and suppliers
- Requires analytical and communication skills
- Challenging to enter negotiations with vendors and suppliers
- Supplier management is an ongoing process
- Negative consequences of poor spend management
- Operational disorganization
- Increased costs
- Low efficiency
- Lack of transparency
- Poor supply chain management
Approaches to spend management
BSM's systematic approach to procurement is what makes it valuable to businesses. Depending on the industry and the core competencies of a company, they can either benefit from automating a few subprocesses within procurement or the entire procurement spectrum. BSM's procurement process encompasses various processes and subprocesses, including source to pay, source to contract, invoice to pay, and procure to pay.
- Source to pay: This is the entire procurement process, from identifying and selecting suppliers to placing orders, accepting invoices, and making payments. S2P affords transparency to the entire procurement process, improves compliance, collaboration, and trust among supply chain participants, and helps organizations obtain better pricing.
- Source to contract: This process begins with sourcing products or services from a competitive set of vendors. Business requirements are analyzed, documented, and shared with potential vendors, and quotes are gathered from them. The contract is awarded to the vendor that best matches the business's requirements and provides the most promising quote.
- Invoice to pay: This subprocess involves accurately assessing and paying invoices, which can involve critical steps such as matching invoices to contracts, orders, and accepted or rejected deliverables, and obtaining approvals. Automating this process can provide important efficiencies for a business's accounts payable team.
- Procure to pay: This subprocess integrates the purchasing department with the accounts payable department to create greater efficiencies. It includes requisitioning, purchasing, receiving, paying, and accounting for goods and services. Unlike S2P, it does not include the function of sourcing vendors.
Some steps to follow in BSM are:
- Identification and Collection of Company Spend Data such as purchase orders, receipts, invoices, payment data, supplier contracts, department-level expense policies, spend categories, and existing spend management tools.
- Centralization, Verification, and Classification of Expenditure Data
- Analysis of the Spend Data Once the data has been centralized, verified, and classified to identify discrepancies and opportunities for cost savings or process improvements.
- Framing of a Spend Strategy using the knowledge gained from the analysis. Forecasting lets you estimate the ROI and impact of these initiatives and plan for future expenditures, optimize your supplier relationships, and gain flexibility in responding and adapting to changes in the marketplace.
Companies are increasingly investing in various kinds of spend management software. According to Verified Marketing Research, the Total Spend Management Software Market reached USD 1.08 Billion in 2019 and is expected to grow at a CAGR of 17.7% from 2020 to 2027, reaching USD 3.97 Billion. This growth is driven by several factors, including the need for supplier and market intelligence, predictive analytics for internal compliance policies and external contracts, and the increasing demand for cloud computing technology.
Spend management solutions
There are different types of spend management solutions, such as procure-to-pay and source-to-pay solutions, invoice processing and management solutions, travel and expense management solutions, and contract management solutions. Each solution offers unique benefits, such as automation, cost control, compliance, and improved visibility into spending, allowing businesses to choose the solution that best fits their needs and integrate it with their existing systems to achieve greater efficiency and cost savings.
Automated spend management solutions are becoming increasingly popular for businesses looking to streamline their procurement processes and manage spending more effectively. These solutions can range from mission-specific platforms such as an invoice scanning and management system to accounting systems with spend management capabilities to dedicated all-in-one spend management platforms.
- Expense management tools and procurement software can automate approval workflows, expense claims processes, and payment management.
- Payment or expense cards offer several advantages over corporate credit cards, including the ability to restrict spending to a specific employee, supplier, or project, and to track expenses by category.
- All-in-one spend management platforms combine multiple tools, databases, and analytics into a single centralized solution, offering businesses a high level of flexibility, scalability, and capability to manage expenditures.
In adopting spend management solutions, it is important to establish a comprehensive expense policy that applies to everyone in the organization and educate all employees on identifying and tracking spending. Having a reliable reporting system with easy submission processes can also encourage compliance and streamline expense reporting. Additionally, implementing an automated spend management system can simplify work processes, minimize communication and paperwork, and allow for more efficient spending tracking and collaboration, ultimately leading to increased productivity and revenue.
Automate business spend management with Nanonets
Nanonets can be part of your powerful spend management solution that can help you save a minimum of 5% on your spending. It leverages artificial intelligence (AI) to extract spend data from a variety of sources, which can make finance teams more efficient, enabling them to achieve 10x greater productivity.
With Nanonets, all your spending data is consolidated into a single, easy-to-use platform. The solution automatically syncs invoices and payment information from any source, ensuring that all your financial data is up-to-date and ready for review.
One of the key benefits of Nanonets is its ability to prevent unnecessary or wasteful spending. It provides financial controls such as approval workflows, duplicate alerts, and fraud detection to ensure that there are no wrong spends. This means that businesses can save money by avoiding unexpected or unnecessary expenses.
Nanonets also offers 1-click integrations with your ERP and payment software, making it easy to integrate into your existing workflows. Payment and reconciliation processes are streamlined and automated, allowing you to focus on more strategic tasks.
Spend management is critical for any organization seeking to optimize its financial resources. Business spend management (BSM) software provides real-time spend visibility, helping organizations centralize their cash flow management into a single platform. It allows finance team members to log in and see every transaction as it happens, forecast spending, and correct wasteful behavior. BSM also helps in controlling employee expenditures by consistently enforcing policies, setting personalized credit card parameters and controls, and prompting requests for pre-approval before purchases are made. In addition, BSM software improves reporting accuracy by using machine-learning algorithms to organize and digest data and draw out insights and connections that highlight cost-saving opportunities. Finally, BSM automates workflows, reducing the tasks employees would otherwise spend hours doing manually. By creating rules for vendors and specific categories that automate spend management, spending can be automatically optimized. BSM software helps finance managers and accountants more effectively manage how their companies spend money, ultimately optimizing the organization's bang for its buck.