Spend Management brings Insight to the Payables Community

Recently I have been helping organizations optimize their usage of AP automation.  One area centers on relating their accounting practices, policies, and culture represented in the design of their Chart of Accounts along with how AP automation solutions collect and present financial activity.  An idea I share is being aware of different perspectives found for recording, viewing, and interpreting financial activity.  An important perspective AP automation brings that many in the Payables Community are unaware is “spend management”.

I mention this in my post about Workflow Engineering – understanding the underlying business objectives surrounding payables, and how these fit into organizations’ missions and cultures can identify areas to apply data analytics that provide insight in how to better achieve these objectives.  Spend Management is an example of such data analytics.

Financial Reporting is Only One Perspective

Financial Reporting is the formal reporting of an organizations financial activity with the Balance Sheet and Income Statement being the most well-known examples.  The perspective is one from a high level where the people reading it want to monitor and analyze the overall financial success of the organization.  Its nature is delivering information at a summary level suitable for investors, owners, executives, and other stakeholders to easily and quickly grasp.

Chart of Accounts Provide Strategic Perspective

The summary level information found in Financial Reporting tracks only the most essential aspects of financial activity.  Financial executives identify what are these essential aspects and design the Chart of Account with these in mind to ensure they record all relevant financial activity appropriately.   This design also relates to recording financial activity so that it will appear on the appropriate report in Financial Reporting such as the Balance Sheet or Income Statement.

Spend Management Provides Operational Perspective

Spend Management is another perspective of financial activity.  Here the viewpoint is from an operational or tactical side in contrast to the more strategic Financial Reporting standpoint. Here the focus is more about operational efficiency and effectiveness.

The financial activity in Spend Management is at the heart of the issues in the Payables Community because it includes only financial activity related to buying and purchasing the goods and services organizations need to operate.

These are a subset of the financial activities found in Financial Reporting.  More importantly, because Spend Management has a tactical perspective, it uses detail level information that isn’t necessary or useful in Financial Reporting.

Detail Allows Better Insight

Deeper granularity allows insight into how effective an organization’s spending is through Spend Management reporting and business intelligence.  Spend Management uses this level of detail to identify patterns of spending that may indicate opportunities to improve how well this spending contributes to the organization’s business objectives.  Management uses this insight to change spending behavior to take advantage of these opportunities.

Employee Spend Management

Spend Management is especially useful for areas of spending that are controllable, and where the employees purchasing goods and services aren’t Procurement professionals.  Here the people making these purchases have a primary job function outside optimizing purchasing.  So, they rarely have the training, tools, or motivation to make better purchasing decisions for the organization.  Often, this is called, Employee Spend Management.

Expense Types Provide Tactical Perspective

If the Chart of Accounts is at the center of recording financial activity for Financial Reporting then Expense Types are at the heart of recording financial activity for Spend Management.  Like a natural account in the Chart of Accounts, an expense type notes the nature of a purchase that is an expense to the organization.  The expense type provides more detail about this nature that is the case in the Chart of Accounts.

A simple example is recording spending related to travel and entertainment.  A standard Chart of Accounts will have one or two natural accounts for travel and one for entertainment.  With Spend Management there can easily be more than a dozen expense types that more precisely measure the travel related purchase.  Consider just covering the basics, there are expense types for airfare or train, communication, entertainment, ground transportation, lodging, and meals.

Accounting and AP Automation Applications

Most organizations use an accounting application to track the financial activity for their Financial Reporting.  For Spend Management, organizations must turn to Accounts Payable automation solutions.  This is because AP automation applications record financial activity to the detail level necessary for Spend Management.

Travel Spending Illustrates the Power of Spend Management

A great example of Spend Management is managing travel spending which for many organizations represents a large percentage of their controllable spending.  By its nature, the people buying travel services are rarely Procurement professionals.  So, there is a lot of opportunity for improvement.

AP automation applications designed specifically for tracking travel-spend capture travel related purchases noting expense types, merchants or vendors, locations, and other aspects.  Armed with detail, these applications provide Spend Management reporting and business intelligence that uncover opportunities.

Perhaps there are discounts from hotel properties located near where employees routinely travel?  Or, what is the most effective form of ground transportation (car rental, shared ride service, public transportation)? Or, how much are we spending on mobile communications?

Workflow Engineering is the Key

These are just a few of the opportunities that Spend Management provides.  The key to success to finding these opportunities is using Workflow Engineering to understand the underlying business objectives. Armed with this, it’s possible to identify the parts of the business where operational efficiency and effectiveness is impactful to these objectives.  This is where applying Spend Management including collecting the essential details of purchases employees make yields the insight necessary for identifying the opportunities.