Best practices for establishing full spend control, increasing finance data quality, and optimising company spending.
Even the largest of organisations had to start small. And at the beginning, with just one or two founders, all spending is relatively straightforward. You know what your company is all about, you have a feel for how it should spend its money, and you’re able to easily check back with your colleagues.
In these early stages, you and your fellow founders are the ultimate decision makers on all matters, and you don’t need to consult with anyone else to ensure your organisation’s money is spent appropriately.
The problem is, this changes as your organisation evolves. Be it through growth, increased turnover, or in some cases, personnel changes; the decision-making process can become rather convoluted. With more people involved (in-house and remote), opinions on how to manage spending tend to vary; different departments will have differing points of view and not all of this information will make its way back to the ultimate decision makers.
The bare minimum: take control of your bills
The minimum objective is to only pay for what you’ve ordered, meaning you must be sure that the bill is correct, avoid duplicates, and pay every bill only once.
This requires putting all bills through a proper approval process to validate that a particular amount is exactly what you intend to spend with this particular supplier, that these are the price and payment arrangements you agreed to, that each bill is correctly coded, and that you haven’t already paid this bill or part of it.
However, controlling the incoming invoices is obviously a reactive measure as there’s already a bill to pay. Also, in many cases, such kind of bill controlling results in poor finance data quality because the business context for payments is not readily available. In turn, this hinders a proper coding of the spending and makes it difficult to establish the cash flow prognoses.
Proactive spend sontrol: introduce purchase orders
To overcome these issues, it’s essential to set up a clear, controlled, and documented process for purchasing. This is typically done by introducing the concept of purchase orders, or spend orders in case of non-profits.
Purchase orders (POs) or spend orders capture the key aspects of each intended spending, such as: spending purpose or description, supplier details, expected cost, and other data.
In small organisations, POs are usually entered directly into the accounting system. Only, if POs are raised by non-accounting personnel, there are often difficulties regarding:
- Validation of each spending by operations and business
- Managing, verifying and approving suppliers
Manage POs outside of your accounting platform
Once you have more than just a couple of purchase requesters, you need a purchasing software which provides the capabilities for raising POs as well as reviewing & approving them outside of the accounting system.
Using a dedicated purchasing solution enables you to specify suppliers eligible to be used by the corresponding requester categories, and allows to set and control supplier spend limits.
Most importantly, it lets you define and limit requester rights as well as establish the proper purchasing authorisation for business users acting as approvers.
X-Way matching of bills with purchase orders
Once you have both a bill and a purchase order authorisation process in place, the next step is to close the loop by introducing x-way matching.
2-way matching, for example, makes sure bills are always matched with their corresponding pre-approved purchase orders.
3 and 4-way matching are more advanced options, requiring the validation of received goods and/or services against the actual purchase order.
Proper coding and spend analytics
The most frequent reason for declining data quality is the loss of business context when finance approvals are made only weeks or months after the payment has left the bank. Business approvers – who actually hold the business context – simply do their reviews too late to remember what a particular transaction was about and often generalise the spending description.
Obviously, the earlier approvers are getting involved in the review and approval process, the better!
Automation and decision control
Enhancing your cloud accounting platform with a decision control system is a natural step in establishing effective spend management. A decision control system – or an approval workflow solution as a subset thereof – will take excellent care of automating your approval processes.
This includes the setup of granular review and authorisation roles, keeping the approval process running by sending notifications, generating meaningful reports, and handling approval exceptions.
Complementing a cloud accounting platform with a decision control app to replace a manual or email-based approval system is most rewarding. It will boost productivity and help you establish a proactive, real-time decision-making process that ensures better process efficiency and higher executive accountability.
This all can be achieved with Xero as the core accounting platform and ApprovalMax connected to it.