Businesses looking to succeed in this volatile economic climate must take steps to ensure they keep their heads above water.
Employ unsustainable business practices, and you’ll find your organization struggling for viability within a few years. Most businesses are very strategic when it comes to growth and maximizing revenue, but not many think strategically about spend. It’s equally important to employ a spend strategy – a plan to optimally balance your spend and revenue for long-term sustainability.
Here are the five telltale signs that you need to re-evaluate your spend strategy:
You have an overdraft founded on expectations. Many startups make a huge mistake, right at the inception of their business: overestimating just how quickly it will take to break even. One of the reasons these businesses fail is that their founders dole out cash indiscriminately, in hopes that within a year or so of operation revenues will catch up to and lap their spending. Of course, this has been proven to be false, time and time again.
In the startup world, 90 percent fail within their first five years. Many studies have been conducted per year by top research firms such as CB Insights on why startups fail. The top reason is poor product-market fit, and the second reason is running out of funding too quickly.
Tip: Spend smart at the start of business. Your goal at the beginning is to lay a solid foundation that is not easily shaken by the challenges that will undoubtedly come. Cash flow is key, so have a solid idea of what to expect within a financial period.
You have a reactive organizational spend culture. Does your organization have a clear and documented policy when it comes to spending? Do you expense for purchases after they are made? Perhaps your organization only accrues for spending after the invoice has arrived, or employees are free to use the company credit card as they’d like. Organizational culture is important in many companies to ensure employee satisfaction and productivity, but spend culture is the financial backbone that supports organizational culture. If your organization is reactive when it comes to spend, it’s a red flag that you need to establish a spend strategy.
Tip: Re-evaluate what your policies are like for company spending, and ensure there’s a blend of controls and accountability in place – for example, issuing corporate credit cards with a spending limit, or pre-approving spend before it happens.
You lack a clear business focus. Say you’re a green, fresh-out-of-college lawyer with significant savings, and looking to start your private practice. By the end of the first six months, you find that you have spent significantly more on things that have no actual bearing to your practice of the law – you haven’t given your business's core focus the top billing when spending. Instead, you’ve diverted money to, in a manner of speaking, irrelevancies.
Tip: Refocus your spending on your business's core objective. Avoid distractions that will undoubtedly incur significant financial commitment.
Your spending tracking is ad hoc and disorganized. Many businesses today live on the edge, spending for the moment in hopes of investing in growth. In many organizations, spend is only accrued when the invoice is received by the accounting team. Individual departments and teams have no regard or visibility to how and why resources are being allocated, which creates uncertainty when it comes to budgeting, and lack of accountability when spending on behalf of the organization. When recording spend, the use of paper and spreadsheets cause valuable information to be lost, and it’s hard to consolidate when it comes to month-end.
Tip: Each department should share the accountability of making sure that spend is being tracked properly. Using spend-tracking software automates manual processes and helps feed spend data into a consolidated platform. Many spend management solutions also have integrations to ERPs and other popular accounting software.
You’re ignoring rogue and maverick spend. Maverick spending is defined as spend that occurs outside of agreed contracts that is non-compliant. These purchases can be small but add up quickly, and are costly for organizations. According to APQC’s Open Standards Benchmarking Report for Finance, 2 to 5 percent of organizations’ spend is maverick, which is a significant amount in enterprise-level organizations.
Tip: According to Hawtrey Dene’s procurement consultancy team, the number one reason why maverick spend happens is employees bypassing time-consuming and ineffective processes. Start by evaluating your purchasing process, and updating outdated tools and procedures.
Making a change: There’s no gainsaying the fact that many businesses today are spending more than they earn or can afford. Spending strategy and management has become an oft-overlooked aspect of running a viable business. However, there are a number of proactive measures that can be taken to reposition your company, cut out bad financial decisions, and get on the path to sustainability and profitability. Your spend culture will make or break your business, so it’s in your best interest to take radical steps to right your ship and establish a good spend strategy early on.
Aman Mann is CEO and co-founder of Procurify.