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Is your indirect spend draining your finances?
Indirect spend often goes under the radar in many businesses as it is overshadowed by more visible spend, plus with different employees managing and spending their own budgets across the business, indirect spending can quickly spiral out of control.
Indirect spend accounts for approximately 25% to 40% of overall company spending, but Director of Policy at IBM, Javier Urioste suggests that companies are only capturing around 40% of their total spend under purchasing, meaning a staggering 60% is going unaccounted.
Before you know it, the hidden costs of your indirect spend are mounting up and finance have lost all control of spending. Invoices are landing on their desks and they are spending considerable amounts of time chasing for evidence of these spends to identify who they belong to, and in the meantime finances are spiralling and finance are having a challenging time to keep financial stability intact.
Before we go any further let’s take a few minutes to discuss what we mean by direct and indirect spending.
Direct spending refers to the costs associated directly with producing your products or service such as raw materials, machinery costs and labour and these costs directly impact the volume of goods you are producing i.e. the more you spend, the more you produce.
Indirect costs on the other hand supports the overall running of the business by ensuring it has the necessary resources. Indirect costs apply to the costs not directly linked to the production of your product or service like stationary costs, travel, admin fees, staff training and software licenses.
The average company is acquiring more indirect costs, unnecessarily complex supply chains and a lack of transparency over indirect spending and the overall financial status of the business.
Indirect spends may be small sums, but over time these add up considerably and can have a significant impact on profits and financial stability. However, locating these cash leaks can be tricky and companies often experience challenges managing indirect spending.
The main difficulties associated with managing indirect spend include:
Establishing indirect spend management processes are vital for realising cost savings and real-time visibility.
Follow our simple steps to manage your indirect spend effectively.
Centralising indirect spend gives you a clear view into where your money is going which helps to identify maverick spend and areas for cost saving. This means implementing clear spending policies and concise guidelines to enforce control over the procurement function.
We have previously written an entire blog post on gaining spend visibility, but in a nutshell spend visibility gives you a real-time insight into the exact status of your finances so you can see what is being spent and where. It pinpoints areas of concern and helps you allocate budgets accordingly.
Approvals ensure your policies are being followed and they make sure that every purchase made is going through the finance department with a clear paper trail, fully documented and compliant. This gives finance full visibility of all purchasing that is going to occur before it actually takes place.
By specifying a preferred supplier list and ensuring all purchases go through a pre-selected number of suppliers reduces risks and improves supplier relationships which in turn result in better terms, preferable deals and competitive service. It also reduces risk as you know your preferred suppliers deliver a good service.
Once you have established your preferred supplier list it is important to run regular reviews to ensure you are getting the best value and service from those suppliers. That means reviewing the competitiveness of prices, delivery timescales and the cost effectiveness of staying with specific suppliers over an extended period.
Even small businesses generate vast numbers of invoices and many of them are for small, indirect spends yet still take accounts payable teams the same amount of time to process and approve. Implementing software to automate manual tasks which slow down your accounts payable team will save time, reduce the risk of fraud and offer valuable insights into spending patterns.
Without even realising it, the indirect spending within your business may well be running havoc with your financial stability, and without clear management of indirect spend, costs may continue to spiral. A key step in managing your indirect spending to ensure they don’t cost your business the earth is implementing clear policies and approval workflows for your employees to follow and combining your indirect spending by using clear categories and a specified supplier list is fundamental to maintain control.
For more information about managing your accounts payable process and company spending please contact us today.
Posted On: May 01, 2024
