5 Ways to cut wasted spend
Oversight and controls to manage all spending as it occurs.
As belts tighten in response to the stalled economy due to COVID-19, business leaders are scrambling to make sense of the situation and determine what steps should be taken to protect their businesses. In a March 24 Gartner survey, over 200 CFOs were asked about how they were responding to the economic crisis. One of the four key areas of focus was cost discipline. The survey notes that “the timelines for cost savings initiatives that were previously pushed back have now been brought front and center.”
Cost discipline and decentralized spending
For many finance teams, cost discipline has been made difficult because of the shift over the past few decades from centralized purchases, made by procurement departments, to decentralized spending across all departments. Empowering teams to make purchases for a variety of things – including T&E, software subscriptions, ad buys, office supplies, independent contractors, and more – has been a valuable contributor to company growth.
However, decentralized spending is often backstopped by an inadequate series of disjointed workflows, and several siloed software solutions, that require manual input and reconciliation. Taking steps to address these inefficient spend management practices has many benefits, one of which is securing the tools to manage costs by curtailing wasted spend.
Getting oversight and control
The growth of decentralized spending has been fueled by subscription pricing, especially for SaaS products, along with an increasing reliance of vendors on digital payment. These trends are expected to continue and will create even more of the decentralized spending which lacks the visibility and controls that centralized spending enjoys. In response to this reality, comprehensive spend management must provide the best of both worlds; the control of centralized spend and the empowerment for employees of decentralized spend. The right process for visibility and control can help eliminate wasted spend in the following 5 ways:
- Eliminate orphan spend.
- Eliminate unnecessary or duplicative spend.
- Curtail fraud and the time it takes to address it.
- Take advantage of discounts and price breaks.
- Negotiate the best deal possible.
#1 Eliminate orphan spend
Historically, empowering high-performance teams to secure the resources they need has meant providing one or several credit cards to individual departments. When an employee signs up for a subscription using a company card, that recurring charge will continue even if the employee leaves the company or stops using the service. These “orphan charges” often go undetected and can add up. A good spend management platform provides alerts when an employee leaves a company and still has an active corporate card. In addition, it will follow best practices for annual locking of cards so that renewals are properly vetted before being paid.
The advent of virtual cards helps with these orphan charges because payments are tied to a specific person (referred to by Airbase as Spend Owners), and to a specific vendor, not to a generic corporate card. When a Spend Owner leaves a company, the service can be cancelled or transferred to a different employee. Tracking renewal dates to give companies time to decide if it wishes to continue with the service, particularly if associated with someone who has left the company, so that the company is not locked into a full-year contract.
Orphan charges can take up time for a finance team once they are identified because the vendor must be contacted to cancel future charges. Some vendors make cancellation onerous, and require a phone call, rather than a simple online process. Proper spend hygiene is a good way to ensure that these orphan charges do not pile up and waste money.
#2 Eliminate unnecessary or duplicative spend.
If you don’t know what spending is occurring, you can’t possibly control it. Management doesn’t usually see spending until after the month-end close. This means that there isn’t time to stop unnecessary spending before it occurs. With a spend management system, companies have approval workflows built into the spend process and real-time reporting for visibility into what is being spent. This oversight and visibility allow companies to ensure that they are operating within the budgets they set.
In many cases, the same corporate card is used by several people in the same department, which can result in little accountability for spending. Oversight into what is being spent, and by whom, as well as establishing if it is essential to spend the money now to meet current objectives, is an important function that is often obscured by ineffective approval workflows.
As companies seek ways to optimize costs, approval workflows are extremely important. Information on what services are already being paid for to avoid overpaying should be built into those workflows. An alert to employees showing their company is already paying for a service when a request-for-approval form is created prevents overpaying before a purchase is made.
The ability to see the companywide, department-level, or individual spending in real time, provides an essential tool for managing expenses, especially in this difficult economic environment. A spend management system that automatically syncs to the general ledger provides important insight into a company’s financial condition on any day of the month, and catches transactions or trends as they happen.
Providing tools to track spending with real-time reporting and effective approvals are essential ways to provide the oversight required to curtail unnecessary spending.
#3 Curtail fraud and the time it takes to address it
Fraud can come from both external and internal sources. External sources typically find ways to infiltrate a payment system, especially credit cards. Internal fraud occurs when oversight and control fails to properly monitor and control any dishonest activities of employees.
With annual U.S. credit card fraud exceeding $10 billion, along with over 1.7 million reports of fraud, most companies have experienced compromised company cards. At times the fraud can go undetected, which means that companies are never able to recoup the charges. This can happen when fraudulent activity is perpetrated below the radar in small increments, which can add up over time. Departments that share a credit card make detecting this type of fraud particularly difficult.
Whether or not money is ultimately lost or recovered from fraudulent charges, the wasted cost involved in manually checking for fraud, canceling compromised cards, working to get fraudulent charges backed out, and submitting new card details to vendors with recurring charges, needs to be taken into account. This is critical time wasted by finance teams that have far more important ways to contribute to their company’s success.
The move to the usage of virtual cards, which are assigned to an individual and are specific to a vendor, is helping to curtail this type of fraud and is alleviating the burden that managing and responding to it places on a finance team.
Beyond credit card fraud, companies also experience fraud by employees. According to a 2016 study by Hiscox, a global specialist insurer, companies lose $50 billion per year to fraud. Small to medium-size companies are the most heavily hit, with their median loss being $289,864 each year.
Clearly, companies need to impose procedures throughout their operations to prevent theft, hacking, embezzlement and other forms of fraud. However, securing spend management processes around the approval and execution for employee spending works to close this potential opportunity for abuse. The lines for acceptable corporate card use can get blurred for some employees and, once charges are made, recovering money from an employee can be difficult. Giving responsible oversight capabilities to management before a charge is made provides the tools needed to ensure that company spend policies are followed, and that the right tracking provides documentation of adherence.
#4 Take advantage of discounts and price breaks.
When companies lose track of the number of seats, subscriptions, or licenses that they have with a specific vendor, they can miss important price breaks or discounts. These price breaks are often associated with SaaS products, which is one of the largest sectors of decentralized spend. Access to reporting, and the tools to track company-wide purchasing of SaaS products, give finance teams insight into the information they need to seek discounts and price breaks.
#5 Negotiate the best deal possible.
Decentralized spending means that vendors, not buyers, have all the information and leverage when it comes to pricing. For larger purchases or contracts, an employee might be fully motivated to get the best deal for their company, but they may not have sufficient information on cost comparisons of alternatives. When purchases are made outside of a procurement department, the employee making the purchase may not have experience with negotiating contracts. They may not know how to push for certain concessions or, when negotiating a subscription type product, may not understand how to get bulk pricing discounts.
In negotiating the best deals possible, it is essential for companies to have a pre-approval process that flags what spending is being requested before it happens. This gives management the time it needs to review vendor options and to negotiate contracts that are in the best interests of the company. It also allows companies to involve experienced negotiators in the process so that favorable terms are achieved.
Cost discipline is clearly an important focal point in the current economic environment. The very process of spending by companies creates opportunities for significant waste. A process that incorporates all aspects of spend, and provides oversight and control, can help curtail, or eliminate, this waste. Taking a holistic approach to spend management is a smart way for finance teams to bring cost discipline to the front and center.
Stay safe and emerge stronger.
Airbase offers a one platform solution to manage all non-payroll spend. It provides oversight and control over spending with real-time reporting and automatic syncing directly to your general ledger. Control all payments – physical cards, virtual cards, ACH, and checks – from one place. Close faster. Empower employees. Control spend.
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