Business spend management: Definition, importance and tools to know

Finance and procurement teams share a common goal: optimizing company spending to reduce unnecessary expenditures and keep a high return on investment (ROI). While cost-cutting is an important exercise, it's not the only objective of spending management. Spending more can drive efficiencies or create quality gains that make your business more profitable.

The practice that allows procurement and finance teams to collaborate on optimizing company spending is known as business spend management. Ahead, learn the importance of business spend management, its impact on profitability, and four powerful tools for controlling and optimizing company spending.

What is business spend management?

Business spend management (BSM) is a collaborative practice that identifies opportunities to improve and optimize company spending habits.

Successful BSM relies on collaboration, mainly between finance and procurement teams. It also requires the input and commitment of department leaders, mainly if purchasing is decentralized and not solely the responsibility of the procurement department.

The primary goal of business spend management is improving profitability. This profitability comes through cost reductions, such as renegotiating existing contracts or revenue-driving initiatives, like sourcing a new software platform that allows you to offer an additional service.

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Business spend management divides into three categories.

1. Procurement management

Procurement management is the overseeing of activities involved in sourcing and procuring new goods and services, such as:

• Market research and analysis
• Vetting of potential vendors
• Supplier risk analysis
• Contract negotiations
• Vendor relationship management

2. Staff expense management

Expense management is the process of monitoring and processing employee expense claims. It involves cost control initiatives, such as expense approval workflows, and undertakings to increase efficiency, like automated expense claims systems.

3. Invoice management

Invoice management involves the processing and payment of vendor invoices. Efficient invoice management utilizes software to make invoice approval and payment processing quicker and more accurate. The software can also detect and mitigate fraud attempts.

Learn more about invoice management software in our guide: 5 best invoice management systems [2023].

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Benefits of business spend management

Lower costs and higher ROI

Effective business spend management helps companies reduce costs and realize a higher return on investment. You might identify that you currently pay for two software tools that do roughly the same thing. You can reduce software expenditure by eliminating one relationship and consolidating usage into a single platform.

Improved efficiency and productivity

Spend management practices seek to improve business efficiency and productivity by identifying areas to automate or simplify cumbersome processes. For example, you could implement an invoicing processing software tool to help with accounts payable. By setting up custom automation rules, you save time on invoice processing and avoid potential late payment fees charged by your vendors.

Enhanced spending compliance and reduced risk

A stronger focus on business spend management ensures employees follow spending guidelines and reduces the likelihood that your company is a victim of fraud or other risks (like security risks). By designing and distributing clear purchasing guidelines, you can require that a senior leader approves purchases above a certain dollar threshold and that the CTO sign off on any new software purchases.

This distribution mitigates the risk of fraud by enforcing a double-check on large purchases. You also reduce the likelihood that an employee creates a tech or security issue by integrating a software solution with less-than-ideal data handling procedures.

Spend management challenges

Decentralized spending

One of the biggest challenges to controlling business expenses is when companies have a decentralized procurement process.

Decentralized purchasing means that business unit or branch leaders have the authority to make purchases without the prior approval of IT, Finance, or Procurement team members.

As such, expense tracking becomes more complex, leading to increased costs.

Corporate spending cards

As with decentralized spending, corporate credit cards can create a significant issue in managing and minimizing business spend.

One of the most significant risks here is that cardholders can sign up for software subscriptions without the express permission of IT stakeholders. These risks can lead to data security issues and the proliferation of unmonitored (sometimes unutilized) subscriptions that suck cash flow.

Poor data management

Many teams still operate using outdated data collection methods, like spreadsheets or handwritten forms, for processing spend reimbursements.

This outdated operation leads to poor data management and limits visibility. The ideal solution is implementing a spend management tool to control expenses and centralize data into a single source.

Low spend visibility

If teams aren’t using a centralized spend management system to categorize and track all business expenses, it becomes difficult for finance teams to gain real-time visibility into spending. Effective and accurate forecasting and financial reporting go out the window without sufficient visibility.

Resistance to change

As finance teams seek to implement a more rigid spend management process, they often meet resistance from those who are happy operating under the status quo.

This resistance comes down to a conflict of goals. Department leaders are likely far less concerned with savings opportunities than their finance team counterparts. They’re much more interested in a purchasing process that allows them to work quickly and efficiently without getting caught up in red tape.

Spend categories for businesses

Companies that have a transparent methodology for defining and categorizing business expenses have much better spending visibility and are better able to make important decisions about reducing expenditures.

Here is a list of commonly used spending categories for businesses:

• Payroll
• Marketing and advertising
• Rent
• Utilities
• Tax
• Interest
• Loan repayments
• Entertainment
• Employee benefits
• Capital expenditure
• Dues and subscriptions
• Bank fees
• Software licensing
• Legal and professional expenses
• Communications
• Office expenses
• Travel
• Maintenance and repairs
• Client gifting

Here are four helpful software tools for managing business expenses:

Effective business spend management uses powerful software platforms that provide real-time insights into company spending behavior and use automation to increase efficiency.

1. Vendr - SaaS supplier management

Vendr is a SaaS buying platform with diverse features for sourcing, purchasing, and managing software agreements. With Vendr, finance and procurement teams identify areas to optimize spending across the contract lifecycle, from the strategic sourcing low-cost vendors to contract renewals and negotiations.

Strategic sourcing support

Vendr’s team of SaaS buying experts helps you find suitable suppliers to support your current business processes, leveraging the most extensive data set of software purchases to benchmark vendor pricing and secure the best upfront price.

Overlapping spend analysis

When purchasing is decentralized, it’s not uncommon for different departments to purchase similar software solutions without consulting each other. Vendr helps identify overlapping spending areas and creates immediate cost savings by consolidating licenses.

Contract management

Built-in contract management functionality allows procurement teams to monitor vendor performance and schedule automated notifications when contracts are about to expire so you never miss a renewal opportunity again.

Real-time spend analysis

Real-time spend visibility lets you visualize the impact of your spend management initiatives on the bottom line. You see how much you spend on each vendor and can drill down on data at the category or department level.

Supplier relationship management

Vendr’s powerful procurement software platform goes beyond sourcing by focusing on managing the relationship. Gain a bird’s-eye view of your tech stack and associated spending, including maverick spend, and track contract renewal statuses with automated approval workflows.

2. PayEm - Automated invoice management

PayEm is a spend and procurement management platform designed to help wonders of large and small businesses take control of spend management. PayEm specifically focuses on invoice management, helping you pay service providers and avoid late payment fees. Key features include:

• Invoice and payment process automation
• AI-assisted optical character recognition to speed up invoice processing procedures
• Integrations with a variety of enterprise resource planning (ERP) tools
• Easy transfer planning and scheduling

3. Expensya - Employee expense management

Expensya is an automated spend management solution that controls and monitors employee expense claims. Teams use automation and employee-facing portals to speed up expense management processes and issue reimbursements. Expensya processes expense reports sent to the finance team and uploads the data inside. Other key features include:

• Company payment cards to manage employee expenses even more effectively
• Integrations with several commonly used tools like Uber, Quickbooks, and SAP
• Centralized business intelligence reports and AI-powered insights

4. Oracle NetSuite - Enterprise resource planning

Oracle NetSuite is an enterprise resource planning platform that helps finance teams manage business spending from multiple angles. It features:

• Price benchmarking to help finance leaders prevent overspending
• An order management suite that lets procurement teams automate purchase order management and control approvals
• Accounts receivable and payable platforms that unify financial processes in a single platform

To help you get the most out of NetSuite, Oracle also offers a global consulting and implementation customer support team, which is available at an extra charge. Interested in more info about Netsuite? We put together a complete guide on what Netsuite is, how it works, and who it's for as well as a detailed guide on Netsuite pricing; check out these resource for more info!

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