Almost every organisation that spends money – from businesses through government departments to NGOs – spends more money than it would like to, writes Stanton Jandrell, CEO of Fraxion.
Once an organisation grows beyond the size where a single individual makes all the spending decisions, risk to the organisation is dramatically increased; this is an inevitable consequence of the way current manual systems work.
Accounting solutions, by its nature, delivers information after the fact: it’s about keeping track of where your money went, not controlling what you still have. That leaves a lot of room for nasty surprises when final reckonings are made, as well as increasing the risk of fraud and maverick spending.
For organisations that want to get control of their spending, then, a big part of the solution is to move away from an accounting mindset to one that understands where spending starts: in the heads, and on the desks, of ordinary managers and employees.
That’s the first best practice lesson we’ve learned from our experience across a range of medium- to large-sized enterprises in different sectors: manage spending at its origin, not in the finance department. You need to extend your control right to the edge of the organisation, far beyond the boundaries of the financial core covered by most ERP systems.
Even today, spending decisions in most large organisations start with a paper requisition which is signed by a manager, then sent to a finance department where a creditors clerk captures the information and issues a purchase order. Receipts or delivery notes are then matched to the purchase order, a payment requisition is generated and authorised and only then is payment made.
This cumbersome paper-based process typically costs around R200-R400 per transaction, making little distinction between high value capital expenditure and lunch expenses claims. Automating the entire process right from the point of first requisition can slash transaction costs to cents. It also enables the second key best practice: managing your spending before it happens. Once the invoice arrives on the desk of your creditors clerk, it’s too late.
In theory, managing spend before it happens is what budgets are for – but in practice, unless your system is completely automated, budget information is always out of date. Manager A, seeing that his budget is 50% unspent, will be quite justified in authorising a request for something that will spend 30% of it. But he has no way of knowing that Manager B, looking at the same budget information yesterday, did exactly the same thing. The result is that the budget you thought still left room for manoeuvre ends up overspent. If your budget information only updates once transactions reach the general ledger – which can be weeks or (in some cases) months after the transaction was first authorised – this kind of situation is inevitable.
To avoid this problem, financial managers need to shift their analysis, and their control, from what has been spent to what will be spent: a move that means access to live budget information, including all outstanding purchase requests and authorisations, must be visible to the line managers who are accountable for most spending. Again, once you’ve automated your process starting with the requisition, this kind of visibility is easily achieved.
Finally, it’s important to manage all your spending, not just your biggest spend category or two. Too many organisations, once they’ve identified that there are vulnerabilities in their financial control systems, focus all their attention on their largest spend category. Sometimes, once that is dealt with, they may move on to capex or other indirect spend categories like travel or general purchasing, but most stop after covering the single biggest chunk.
That’s a mistake: the small leaks in the rest of your organisation can easily add up to a swift torrent. A good spend management solution shouldn’t just automate your purchase requisition and approvals process, it should do so for every area of spend within the organisation, in a consistent manner, preferably with a single solution.
Automating spend control processes in your organisation can slash transaction costs and put an instant end to overspending. It also enforces compliance with all relevant laws and regulations and eliminates a huge portion of the risk organisations expose themselves to when spending isn’t managed and monitored very, very closely. We’ve seen huge capital projects where line item information on million-rand invoices isn’t even captured, let alone checked. That kind of laxity invites corruption, potentially on a massive scale. Automated spend control stops that risk in its tracks.