5 steps to effective spend management

Spend management is a way to keep costs down, optimize for profits, and harness growth. 

It’s also a vital component of procurement management. We’ll walk you through what spend management is, its challenges, why it matters, and the steps involved in executing it. 

‍Heads up! Here’s a way to organize all of the software across your company. Use this template as a starting point for better, cleaner SaaS organization.

What is spend management?

Spend management is the process of making decisions that result in a better bottom line, better profit margins, and cost-effective growth. 

In other words, it’s the practice of getting the most value for a company’s expenses and investments. 

Business initiatives that make up the process of spend management can include:

• Supplier management
• Spend analysis
• Strategic sourcing
• Risk management
• Expense reports
• Spend forecasting
• Contract management

Within a company, the chief financial officer and chief procurement officer are both at the helm of spend management efforts. With the help of cloud-based spend management solutions, both stakeholders can systematize spend management efforts and increase visibility.  

Why is spend management important?

Spend management is a key part of keeping companies profitable. Finance teams achieve profitability by cutting out unnecessary spending, maintaining the accuracy and visibility of the end-to-end billing cycle, and keeping vendor relationships cost-effective. 

Implementing sound spend management practices helps companies achieve key goals like mitigating supply chain risk. It’s a way to enable data-driven financial decisions for optimal outcomes that favor a company’s bottom line. 

Related: Your expert guide to procurement: Processes, types, and stages

Challenges with manual spend management 

Spend management is a vital part of the larger procurement process, and it comes with a unique set of challenges—especially when done manually.  

Manual spend management is vulnerable to human error. As accurate as procurement teams try to be, time-consuming manual processes are prone to human error. Accurate recordkeeping of expenditures becomes a harder task than it needs to be. It also leaves companies in a vulnerable spot. If they need to prove spending or need official documentation of transactions, it’s harder to rely on data with a higher error margin. 

Finding older manual transaction records is time-consuming. The days of filled-to-the-brim filing cabinets are over. Paper trails have been largely replaced by secure cloud-based software that’s easy to implement and customize. The best options scale with the growth of your company. 

You can’t manipulate the data for instant reports and analytic insights. What’s a procurement team to do when they need to share the results of their efforts and can’t automatically pull reports from spend data? Cloud-based software quickly solves this by centralizing all your data into one digital dashboard. Searching for specific data points becomes second nature, and you can quickly generate reports at a moment’s notice. 

It’s harder to enforce spend policies. Effectively enforcing company spending policies and procedures is critical to running an ethical procurement system. Unfortunately, relying on manual processes makes policies harder to enforce because there are no checks and balances. Additionally, manually tracking ownership of who owns what task is increasingly time-consuming. 

Benefits of spend management automation

Once combined, spend management and automation become a powerful duo for procurement teams to leverage. 

The use of spend management software, along with automation functionality, offers plenty of upsides, including:

• Detecting and preventing maverick spending
• Protecting against potential fraudulent activity
• Improved visibility across the whole process
• Accurately categorizing indirect spend
• More easily enforcing procurement policies and guidelines
• Streamlining procurement workflows to save you time and money
• Ensuring transaction accuracy using fail-safes like approval permission customization 

Steps to effective spend management

Effective spend management doesn’t happen by chance. Procurement teams that create procurement systems have a better chance of seeing profitable returns. Here’s each step of implementing a spend management process in detail. 

[1] Define company needs

Getting a clear overview of your company’s expenditures is the first step toward optimized spend management. Once you’ve gathered several types of key data on your company’s current performance, it’ll be easier to make accurate determinations. 

For example, procurement teams can gather expenditure data from each department, growth projection numbers, turnover or labor costs, and current inventory levels. Gathering and centralizing internal data helps teams uncover gaps in the purchasing process and find areas where they may be able to gain a competitive advantage.

Once data is gathered, teams can run analyses to determine what’s working, what needs optimization, and what gaps in processes can be addressed cost-effectively. 

Uncovering company needs based on data can look like: 

• Needing to refine safety procedures to reduce costly company accidents
• Needing to establish a better way to define value created when purchasing and manufacturing goods
• Finding better ways to track project expenditures and their financial impact 

[2] Analyze current spend

How do you analyze current spend? The first steps are collecting, centralizing, cleaning, standardizing, and categorizing all spend-related data. 

Only after your current spend is analyzed can finance teams read the numbers and make data-driven decisions. If you’re missing a centralized platform that simplifies the analysis process, consider onboarding one that offers data reporting and analytics functionality. 

In this phase of the process, finance teams compare current data with company KPIs, uncover spend leakage, optimize expenditures for better deals, and track savings over time. 

[3] Implement better sourcing by analyzing the ROI on supplier relationships

Establishing better sourcing strategies involves shortening the source-to-contract process with pipeline management, sourcing project intake, supplier onboarding, and performance management. 

This can be done by keeping updated supplier records. Over time, historical data is one of the best indicators of where you’re falling short in cost savings and where you’re excelling. It improves visibility into supplier performance and contract spend. 

[4] Establish or amend new spending policies

Figuring out company needs and current spend levels may lead to implementing new spending policies. 

Drafting a spending policy is the easy part—enforcing your policies is where the real work lies. This is why software with plenty of automation features is a critical component to enforcing sound spend management guided by company policy. 

For example, suppose the finance team needs permission from a superior before spending over a certain amount. In that case, procurement managers can use software to set limits and permission controls through the spend management process. This way, companies can easily enforce expenditure guidelines to reach their desired financial benchmarks.  

[5] Standardize your processes with automation

Throughout the spend management process, automation is your best friend. The more you automate, the more the procurement team can invest that extra time into tasks that garner high returns.

These days, automation is synonymous with cloud-based software. Once you’ve vetted and implemented software that works with the needs of your team, you reap the long-term benefits of automation. 

Automation takes care of:

• Repetitive spend processes like invoice payments and purchase order creation
• Contract renewals and updates
• Enforcing company policies
• Keeping the billing lifecycle on schedule

How Vendr can help you optimize your spend management

Built with data-backed insights to support vendor management efforts and cost savings, Vendr gives procurement teams visibility into exactly how much they could save. 

• See the full end-to-end SaaS purchasing lifecycle in one platform, from requests to workflows to annual maintenance. 
• Build the purchasing process you’ve always wanted so you can be in the loop on every dollar spent and get the fairest price available.
• Empower purchasing decisions with data backed by over $1B in transactions, whether you handle the negotiations or leave them to us.

Interested in seeing how you can improve your software spend practices? Use our free savings analysis to get a glimpse into your company’s potential SaaS savings.