Spend Management • 6 min read
Why is spend management crucial for a start-up?
By Laasiya Priya
Published Monday 18 Jan, 2021
Any business – big or small, needs capital more than anything to start off. finding the right capital is the main obstacle that any entrepreneur faces, but right after they setup their dream company, it is hard to keep a track on the expenses. With constant inflow and outflow of cash, any manager might find it hard to analyse and understand the expenses. From money for a coffee order to a major product dispersion, every penny matters when running a start-up because at the end of the day, its hard to stick to a budget without learning how to spend. While most articles on Forbes will tell you that the main reason your company might fail is due to lack of cash, the hidden lines in the writings will tell you that the main culprit here is you not tracking your expenses.

In a fast-paced world today, we understand that its hard to tell where a company spends the most and where it does not, but the digital age, combined with a few traditional practices has gifted us with what we refer to as a 24-carat gold: spend management

Spend management, in simple words, is the process and practice that a company uses to track its spending and expenses effectively.

While each company has its own policies on spending and taking cash out of the company's pockets, many entrepreneurs have revealed that spend management is the right way. From your travel costs to your daily purchasing, tools, and subscriptions – spend management has an eye out for everything outside paychecks and standard operating cards.

This method lets the managers have a better understanding of supply costs, and how to cut them – since they have a working knowledge of where and when the cash is flown out. Spend management practice offers upper management better cost efficiency ideas, while making cost cutting deals.

Spend Analysis: Spend analysis is a systematic process of collecting, cleansing, and analysing supplier expenditures to provide visibility and insight into these expenditures and identify opportunities for reducing costs, improving efficiency, and monitoring compliance through a dedicated platform. Spend analysis is often viewed as part of a larger domain known as Spend management.

Companies can generate answers to the crucial questions affecting their spending like - what am I spending? Am I getting what has been promised for that spend? Organizations perform spend analysis for several reasons: the core business driver for most organizations is profitability in addition to improving compliance and reducing cycle times performing detailed spend analysis helps companies find a new area of savings that previously went untapped.

Ways start-ups lose money due to sloppy spend management practices

While we have talked about the bible to keep your company alive, there are still mistakes that any company might (but hopefully not) commit while trying to be alive in the market. Surveys have clearly shown that 29% of start-ups fail in the first quarter because they run out of money. Here are a few ways that start-ups lose money due to sloppy spend management:

  1. Not setting a monthly/weekly budget: Most start-ups, in the initial stage, do not set a weekly budget for spending, and this is the biggest crime of all. For a blooming company, there are a lot of things to spend on- from materials, personnel to equipment. But a budget is key. Without setting aside cash for an emergency, the founding money will eventually run out, and before the company makes any significant profit, with no tracked spending, the start-ups might have to shut down entirely.

  2. Uncertain sales: Most companies that work in seasonal services or products have complained that the earnings are cut down by half during the offseason. As a start-up, with not much money in the bank, this might be a cruel situation. A lot of companies fail during these times due to lack of spend management. In questionable times, the managers should be sturdy enough to cut down budgets, paychecks and might have to lay off a few employees if needed.

  3. Relying too much on payments: While it is easier to plan your budget according to the payments you receive from loyal customers, sometimes things might go off hand too. Your most loyal customer might pay you a bit late. Basing your expenses on the pay checks you receive from time to time is like living from pay-check to pay-check. This is one of the most common mistakes any intelligent start-ups can make when it comes to finances. It is important to track your spending and earnings, and make your transfers accordingly, while also stacking some money in the inventory.

  4. Sticking to short term solutions: Most start-ups tend to go back to the investors or banks when running low on money. While this may seem like the fancier solutions, the interests will hit you back even harder. This mistake can be simply avoided by a long-term spending and expense tracking plan – to know where your company spends more, and where you can cut off.

  5. Buying 'expensive software's': Start-ups tend to be attracted to expensive software's and materials for the team during the first weeks. But this might account to most of your initial spending going into unnecessary expenses. Instead, with easy shortcut free versions, the company will save a fortune. And when things take off, you can still buy the expensive, extravagant version.

Why spend visibility is important in your company

Companies need to have complete knowledge on where the money is going – good or bad. They need to know where their funds are directed, this means having a spend visibility. However, most companies do not engage in these activities as much as they do in the rest. We assure you, having a transparent picture of spend visibility is extremely important and here is why:

  • Better deals: By spend management, the companies get their spend visibility. This means that the managers now know the cost of materials and services for their product. For companies with a highly competitive market, this means that the company can understand where it can cut its budget to offer a better deal that anybody else in the market. We all know low prices attract the best customers. By having a spending visibility, you can at least offer discounted prices to a few customers, keeping your customer pyramid intact.

  • Crisis management: Every start-up faces financial crisis at one point or the other. Without having a clear picture on where the cash is going, dealing with an emergency is impossible. With spend visibility, the start-ups have a grip on not just expenses but savings as well so when there is a tax, sales or a market crisis, the company has its own money to rely on.

  • Planned to buy: Spend visibility also offers a company a detailed note on monthly purchasings and spending. This comes in handy for the company to make advanced bookings and buyings of any materials or inventory that the company needs on a long-term basis. This way, in a higher demand, your start-ups will be the only one in the market with the right supplies to deliver your customers on time.

  • Saving opportunities: With a clear idea on your expenditure, spend visibility also offers you a very clear data on your savings as well. by having financial transparency, the companies can easily boost up their savings by cutting down enough at easier levels.

Ways you can do Spend management too!

Hence, clearly, spend management is important. While you know this, do you know to manage spending? The technology is at our service again. The two ways a company can go about how to manage spending is by either picking a spend management platform or expense management tools.

Spend management platform:

Platforms like Volopay offer companies an all in one spend management platform that keeps all your expenses at one place. The platform offers you online/virtual cards and physical cards that you can hand out to your employees for any business spending. The budget can be set on the cards, and invoices are automatically handled seamlessly. Not just the budgets, but these platforms also allow companies to make transactions online through the same platform that the manager can easily access at the end of each month. Spending, expenditure, and expenses can be tracked seamlessly on the platform by every employee. The manager also has the power to suspend the budgets whenever required. This way, not one penny goes by without knowledge.

Expense management software:

Employee expense management is a simple software that a company can opt for if it does not want to involve in a one-step platform for all. All the expenses are displayed to the administering manager in real-time. The employees are asked to upload the pictures of each spending on the software or app that helps in making an expense report.

The 6 benefits of spend analysis:

  • Improved visibility and control

  • Rationalization of the supplier base

  • Cost savings

  • Improved Data quality

  • Increased Compliance

  • Better decision making/making opportunities.

As finally we get better decision-making capabilities thus generating improved opportunities for the organization or Start-up, this is both a cost reduction standpoint as well as efficiencies in managing the overall portfolio of spend or supplier base.

Here are a few benefits the company gets when using the business spend management software or platform:

  • Security: The business spends management platforms offer companies multiple levels to spend their money and allot budgets. While doing this in person or without tracking might pose quite a risk to the company funds, the spend management software sends instant notifications to the managers. The one time use of virtual credit cards also has spend verification that makes the life of upper management easier.

  • Accurate data: The managers and employees can always go to the platform and check their budgets and track their own data, which is very accurate. The Business spend management platforms or software's, unlike personnel offers right data with every spending going on record. The managers can also make sure that there is no fraudulent data or scraping involved.

  • Flexibility: This means managing the spending the way an employee wants to. For example, some tools give customisable cards to set monthly thresholds for certain spend categories.

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