What is tail spend and how can you manage it?

Organizations categorize high-volume, low-value purchases not managed by procurement as tail spend — often referred to as decentralized spend. However, as organizations have shifted purchasing decisions and execution to employees who actually use the product or service, tail spend has become a larger contributor to total spending.

This frequently overlooked area involves purchases that fall outside a company’s main procurement plans. This type of spending can occur throughout an organization by employees at every level. When combined, these activities make up a substantial part of business spending.

Tail spend is complex and varied but managing it well can unlock significant cost savings and operational improvements. This article will explore the significance of tail spend and provide insights into effective management, serving as an essential guide for those in finance and procurement.

Understanding the different types of spend in procurement.

In procurement, spending can be categorized into several distinct types, each with a unique role in a company’s financial and operational landscape. Understanding these categories can help organizations craft effective procurement strategies that save money and improve efficiency.

Direct spend.

Direct spend encompasses costs directly related to making the products or services a company sells to its customers. Also known as direct procurement or direct cost, this category includes raw materials or supplies that the company uses to manufacture or assemble its end products. It falls under the cost of goods sold (COGS) in the business’s financial reporting.

Effectively managing direct spend can lower production costs, minimize waste, and improve profit margins, increasing a company’s efficiency, product quality, and profitability. A strong direct spend strategy ensures operations run smoothly by securing essential materials and services timely and affordably, improving production and reducing downtime.

Indirect spend.

Indirect spend is the cost of goods and services that support a company’s operations but do not directly contribute to its main products or services. This can include items like office supplies, maintenance services, software subscriptions, and utilities. In other words, indirect spend supports the background operations that enable a business to function well.

Because indirect spend includes a wide range of categories, businesses may not monitor it as closely as they should. With more oversight, companies can identify overpayments, unnecessary purchases, and opportunities to consolidate suppliers, leading to significant cost savings.

Spot buying.

Spot buying is when a company makes unplanned purchases outside their usual contracts or procurement procedures, often due to urgent or unexpected needs. While spot buying can keep operations running smoothly, it also makes controlling costs and planning budgets difficult.

Well-managed spot buying can lead to cost savings and improve a business’s operational efficiency. A structured approach to spot buying will ultimately contribute to a company’s overall financial health and success.

Maverick spend.

Maverick spending refers to buying that bypasses a company’s procurement policies. This can include buying goods from suppliers who are not preferred vendors, going over budget limits, or failing to get purchase approval.

Maverick spending can result in higher costs and non-compliance with contracts. This kind of spending can also lead to missed chances for bulk-purchasing discounts or negotiated savings. When a business keeps maverick spending under control, it can cut costs and improve budget management for stronger operational efficiency, better compliance, and more strategic outcomes.

Tail spend.

As previously mentioned, tail spending comprises primarily of one-time or infrequent, often low-value, transactions that, when added together, make up a significant portion of a business’s total spend.

Managers often neglect this area because it is fragmented and involves a wide range of suppliers and items that don’t fall under the main procurement strategies. As a result, it doesn’t receive as much attention as larger expenditures. However, despite consisting of seemingly minor individual transactions, it can hide a significant amount of waste and missed savings.

Examples of tail spend.

Tail spending typically includes things like travel, office supplies, marketing spend, conferences, IT services, or software licenses needed on an ad-hoc basis.

It can also include small-scale consulting projects or emergency repairs that don’t fall under regular contracts. Similarly, it can extend to promotional giveaways, travel costs for business trips, or one-time purchases of equipment.

While each example is seemingly insignificant on its own, cumulatively, it can represent a significant portion of the company’s overall spending.

Why tail spend management is so important.

Though minor, these expenditures can significantly drain a business’s resources and prevent financial clarity if not managed carefully. On the other hand, managing them well can boost cost control, improve the accuracy of financial reporting, and improve efficiency. It can simplify the reconciliation process and help maintain financial record integrity. In addition, effective management can strengthen compliance and improve supplier relationships.

Adding tail spend management to financial workflows also provides better visibility by ensuring the accuracy of account balances, which can improve cash flow and lead to better strategic decisions.

Here are a few areas where effective tail spend management can lead to more positive outcomes.

• Accounts payable: Integrating tail spend management into AP tracking boosts cost control by ensuring the accuracy and timeliness of payments. This approach safeguards against overpayments and the accrual of late fees. Additionally, it helps identify discrepancies, such as duplicate billing. Knowing exactly what and when to pay helps companies negotiate better deals with suppliers and plan budgets more effectively.
• General ledger: Effective management of tail expenses helps keep the general ledger accurate. If these expenditures are managed poorly, it will lead to mistakes in the books, which can disrupt financial analysis and decision-making.
• Bank statements and cash accounts: Numerous small transactions can be a headache to sort through and make it difficult to see the real picture of money going out. As a result, it’s harder for a business to spot spending trends or identify potential savings. These transactions also reduce the money available in a company’s cash account. Proper management reduces transaction clutter, ensuring an accurate reflection of cash flows. It simplifies the reconciliation process, minimizing inconsistencies between bank statements and financial records. This increased accuracy and visibility leads to better financial decisions and cash flow management.
• Reconciliation process: Integrating spend management with a strong reconciliation process is key to maintaining clear financial oversight. A high volume of small transactions can complicate and drag out the reconciliation process, increasing the chance of mistakes. However, well-managed spend simplifies the process and helps organizations catch errors or fraud early on.
• Financial close process: Unmanaged tail spending can also make the account reconciliation process more complex and time-consuming. When accounting teams have to sort through and identify numerous minor or one-time financial transactions at the end of each accounting period, it can lead to inaccuracies, budget mismatches, and incorrect reporting.
• Financial statements: These small, less-frequent purchases also influence expense reporting on income statements. They can indirectly affect how assets and liabilities are reported, making it look like the company has more assets or fewer liabilities than it actually does, which can impact cash flow and regulatory compliance.

Tail spend in different sectors.

From healthcare to manufacturing, tail expenses present unique challenges and opportunities. When poorly managed, they can negatively impact a business’s bottom line and operational efficiency. However, when businesses oversee them strategically, it can unearth savings and increase productivity.

Tail spend in manufacturing.

In manufacturing, managing spend is key to smoother production processes and reduced downtime. Manufacturing tail spending can include things like ad-hoc maintenance, spare parts, and materials not central to core operations.

Managing these expenditures well can save costs and streamline supply chains but the challenge lies in tracking and reconciling these transactions accurately in the general ledger.

Automation software can play a significant role here, transforming the manual reconciliation process for increased efficiency and accuracy. This can ensure that every transaction, from vendor payments to petty cash fund expenditures, is accounted for.

Tail spend in service companies.

For service companies, tail spending often includes freelance support or temporary staffing, software purchases, and operational support services. While essential, these expenses do not directly relate to the core business objectives.

Automated accounts payable and receivable reconciliation can help service companies refine operational expenses. It increases transparency and oversight, allowing businesses to eliminate wasteful spending and focus on investments that directly contribute to service quality.

Tail spend in non-profits.

Tail spending in non-profit organizations can encompass event-related expenses, volunteer support tools, and community outreach programs. In this sector especially, efficient management is critical for stretching budgets and ensuring transparency and donor trust.

Here, reconciliation automation software can increase transparency, maximize donation impact, and show fiscal responsibility. By tracking all expenses, even small ones, non-profits can provide visibility into their operations, highlighting how funds received support impactful initiatives.

Tail spend in healthcare.

In healthcare, tail spending typically includes expenditures like medical supplies, temporary staffing, and IT services. These expenses are essential for daily operations but are often undermanaged.

Proper management can help organizations save on operational costs. As a result, healthcare facilities can afford to invest in higher-quality care, leading to better care coordination and patient outcomes.

Steps for better tail spend management.

Effective tail spend management involves strategic steps that can significantly improve cost efficiency and operations.

1. Use advanced analytics.

Using advanced analytics helps businesses achieve a detailed understanding of tail spend, which is important for crafting effective management strategies.

A data-driven approach enhances visibility into where and why small, frequent purchases occur. It also helps stakeholders make informed decisions on how to control and optimize these expenditures for better cost efficiency and operational improvements.

Advanced analytics can identify spending patterns and uncover cost-cutting opportunities using procurement and transaction data. In turn, businesses can visualize spending trends and see where deviations occur, signaling potential off-contract spending.

2. Leverage technology.

Automation tools that streamline the reconciliation process can improve financial visibility. For example, automating the reconciliation of purchase orders, invoices, and receipts reduces manual workloads and minimizes errors. This speeds up the financial close process and ensures all expenditures are justified and in line with internal policies, further driving cost efficiencies.

3. Standardize procurement processes.

Developing and enforcing clear procurement policies standardizes how employees make purchases, helping ensure compliance and improve efficiency. For example, setting clear rules for processing invoices and payments leads to more consistency and fewer mistakes in the accounts payable workflow.

4. Promote a healthy spend culture.

Promoting a healthy spend culture is another strategic element of tail spending management. Insights from advanced analytics and technology can educate teams about the importance of mindful spending, training and guiding employees to recognize the impact of their purchasing decisions. They can also encourage adherence to procurement policies and foster an environment that prioritizes cost savings.

How to conduct tail spend analysis.

To analyze your tail spending, start by gathering all procurement data. This includes purchase orders, customer invoices, and supplier contracts, ideally covering the past year for a comprehensive overview.

Next, organize this data into categories, specifically identifying less-frequent, smaller expenses, and list all suppliers contributing to these expenditures.

Finally, analyze this spending to spot recurring patterns. Search for things like unexpectedly high expenses, frequent purchases from the same suppliers, or irregular purchases that could be grouped together. Decide if these transactions followed the company’s procurement policies to identify any off-contract spending.

From this analysis, you can find opportunities for cost savings, such as supplier consolidation, renegotiation of terms, or shifting purchases to preferred suppliers. Develop and implement a plan based on these findings to address the identified opportunities.

However, keep in mind that continuous monitoring after making these changes is essential. This will help you assess the impact and make necessary adjustments, ensuring ongoing optimization of the procurement strategy.

In addition, analysis is critical for spotting recurring patterns and potential savings but it does require accurate financial records. Reconciliation automation can play a critical role here by comparing transactions with financial records to spot errors quickly. This saves companies time, reduces mistakes, and keeps financial information current for more accurate and efficient money management.

How to manage tail spend with Airbase.

Airbase solves the challenges of managing tail spend by enhancing visibility and control and streamlining the entire procurement process.

With Airbase, businesses can use approval workflows tailored to their tail spend needs, so that every purchase company-wide is vetted by the correct stakeholders. These customizable approval chains prevent unnecessary or unauthorized tail spend, bolstering overall cost management.

Organizations can also create virtual cards for specific vendors or departments for tail spend, enhancing both security and real-time tracking of expenses within tail spend categories.

Airbase’s robust reporting functionality provides comprehensive insights into tail spend patterns. Users can generate detailed reports to analyze spending trends, uncover cost-saving opportunities, and make informed decisions regarding budget allocations.

By providing an integrated solution with customizable approval chains, virtual card management, and insightful analytics, Airbase helps businesses optimize their tail spend management processes, leading to heightened efficiency, reduced costs, and enhanced financial control.

Discover how Airbase can transform your approach to reducing tail spend — book a demo today!