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Do You Control Your Business Spending?

Creator: Nate Edwards | Credit: Nate Edwards

How you manage money in your own life, including how you buy and pay for things, is fundamental to your financial wellbeing. Whether it’s spending too much, missing credit card payments, or deciding whether to pay down a loan vs. keep cash on hand, buying and payment decisions are central to your economic success. This probably isn’t your primary focus in life, but it can become a preoccupation if you handle it irresponsibly. If you manage these decisions wisely, they can give you a real financial advantage. The same is true for a business.

Most businesses view the activity of buying and paying for goods and services as a necessary distraction, but it comes with major consequences depending on how its handled. Failures in the purchase-to-pay (P2P) process can shut down operations, result in overpayment or lost discounts, and result in reputational damage to the company. If wisely managed, P2P becomes a tool to reduce spend and expenses, improve liquidity, strengthen strategic supplier relationships, and provide more accurate visibility into operations.

The P2P process is straight forward in concept but made complex for large businesses by high numbers of transaction, many participants, external dependencies, and precautions needed to ensure payments are accurate. For this reason, large numbers of people are typically employed to make purchases, verify the right things are delivered, and ensure payments are made appropriately.

Many companies have mitigated the cost of these P2P workers by offshoring functions like procurement and accounts payable (AP) to low-cost markets with nominal English language skills like India and the Philippines. This usually comes with its own set of problems as communication with suppliers and internal stakeholders becomes more of a problem. Imagine if you outsourced responsibilities for making your household purchases and paying bills to a typical call center in Bangalore. You could imagine the additional time you’d spend correcting mistakes.

The solution ultimately requires making targeted policy decisions for how you will buy the various things you need to run your business, how you will finance them, and making corresponding technological investments. The more you automate the process, the less of a nuisance and more of tool it becomes.

The focus of extracting value from the P2P process should be on controlling buying behavior, ensuring accurate payments, controlling the timing of payments, and reducing manual effort. This is no different than it is for an individual. There is just more complexity and exposure to risk for a large company because of high spend, large transactions volumes, and many participants. There is endless detail to delve into, but here are some high-level considerations for anyone looking to control or improve their business’ spending behavior.

Control Buying Behavior

Many companies invest in sourcing or category management teams to analyze what they buy the most of and to leverage spend for better pricing. This is great, but it doesn’t matter if the business doesn’t use the suppliers or receive the discounts you’ve negotiated. This is where it is critical to invest in tools to automate purchases as much as possible, hold buyers accountable for their purchasing decisions, and create incentives to comply with preferred supplier policy.

Make Accurate Payments

Large companies spend a lot of money. Those that spend it through a lot of small transactions risk huge overpayments due either to error or fraud. To avoid this, large teams are employed creating specific purchase orders, others receiving and validating receipt of what was ordered, and still others collecting invoices and ensuring what was ordered was received before authorizing payment. Human error is common along this process. The more you can standardize and automate orders, receipts, and invoices (if not eliminate the need for invoicing entirely) the better. Automating these activities as much as possible not only reduces risk and overpayments, but eliminate enormous amounts of manual effort for people who should be focusing on the business.

Control the Timing of Payments

The timing of payments matters for a number of reasons. Most obvious is that late payments can result in penalties, reputational harm, or a supplier refusing to deliver until they’ve been paid. There are also often discounts available for early payment. You optimally don’t want to pay a supplier until the last possible date eligible for a rebate, so as to collect your discount but keep cash on hand as long as possible. This is difficult to do when much of the process is manual and documentation errors occur in the steps mentioned above. The solution is also generally the same as above, along with considering investment in AP optimization tools which allow finance leaders to gain greater control of cash flow.

Reduce Manual Effort

The more energy you put into buying things and paying bills, the less you spend on the things that matter to you. Well planned and implemented automation as discussed above can reduce much of this effort, but there will always be a need for some manual intervention. Relationship matter when dealing with suppliers and there will always be occasional problems with payments that need to be investigated and resolved. Luckily, these are activities are usually tactical and are relatively easy to centralize. A detailed review of how much time people spend performing tasks in the P2P process, and reasonable consideration of whether those tasks can be consolidated with fewer people, usually reveals clear opportunities.

There is plenty of additional detail to consider before investing in a P2P transformation, but hopefully this is some food for thought if it isn’t high on your priority list. Think of it in terms of your personal life. There are creative ways to leverage how you spend and finance, but if you wife and kids use your credit cards with reckless abandon and forget to pay the bills, that problem needs to be settled fast.

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