This article was written by partners and experts from Fluxym and Grant Thornton. It was first published on LinkedIn in French.
The why and how of keeping expense commitments in check
For a little over a year now, finance departments have been hyper-focused on reining in WCR and costs. They need to manage financial performance by keeping a close watch on actual and incurred expenses as they relate to their budget and any updated requirements. An Oracle analysis clearly shows that this trend is emerging as one of the top priority for CFOs in 2024.
On a broader level, companies are keenly focused on shifting from a reactive to a proactive approach based on a targeted spending strategy where they anticipate rather than deal with the fallout. They have no choice but to start creating income forecast scenarios.
The multiple realities of expense commitments
It’s not easy to gain a clear picture of incurred expenses, and certain mindsets can often get in the way. Departments are used to hearing claims like “I didn’t see an invoice, so it’s not an expense.” And remarks like “We didn’t get an invoice for that” are just as common to explain why an expense for the receipt of goods or services isn’t factored into forecasts or earnings.
A crucial component is knowing when an expense is actually incurred. A purchase request is often conflated to mean an expense commitment. We assess the stages of a spending cycle as follows:
- A purchase request expresses a technical need that is linked to a budget allowance. That request may then take the form of a call for tenders, a contract or an order. In no way does it bind the company to any third parties or prompt any corporate expenses to be recognized.
- An order or contract is a tangible way to know the amount owed and a projected date when the goods and services will be provided. The expense to be incurred in the future must be considered when managing the company’s cash flow and earnings forecasts.
- Receipt of the goods or services then establishes an invoice to be paid according to payment terms negotiated with the supplier. That is when the expense is real from an accounting perspective. It’s vital to know when receipts actually occur.
The first fundamental rule of controlling expense commitments is to establish the same guidelines for all stakeholders, from purchasing and finance to operations. They all need to have the same definition of expense commitment, understand their role in the purchasing process and know how purchases affect the company’s bottom line.
The second fundamental rule is to categorize the company’s purchases by type. Commitments and actual expenses are tracked differently depending on the kind of purchase made:
- Stock items are usually easy to control because they’re directly linked to production and automatically replenished with planned delivery dates and subsequent invoicing.
- Non-stock items are usually where the trouble begins because there’s no plan or process. This is where we find unapproved purchase requests, unlisted suppliers, non-negotiated prices, unexpected payments, etc. At best, there’s no bird’s-eye view.
- Subscriptions and recurring expenses are not always well indicated in budget forecasts.
- CAPEX purchases, a buying category where finance often has little visibility on reception times, and in turn on payment due dates.
A Procure-to-Pay solution now offers a way to structure purchasing and finance business procedures for every step of your supplier processes, from listing suppliers and their product mix (catalogs and PunchOuts) to purchase request input and approval, order placement, reception tracking, order-invoice reconciliation and invoice payment approval. One great feature of these solutions is that they create distinct purchase types, which helps more accurately control and manage expense commitments, notably when supported by embedded targeted KPIs.
A macro view of expenditure across all the company’s stakeholders
Many parties throughout the company need a clear view of spending. They are each working toward their own objectives based on a piecemeal approach to expense commitments at different times and levels of granularity:
The purchasing department’s objectives:
- Raise the coverage rate by finding hidden expenses
- Plan for contract negotiations and revisions
- Identify savings opportunities
- Optimize supplier listing management
- Streamline the volume of suppliers
- Diversify and meet compliance requirements (Sarbanes-Oxley)
- Secure the supply chain (insourcing)
The finance and management control department’s objectives:
- Make receipt reporting more reliable
- Optimize cash flow with short- and medium-term visibility on payment amounts and deadlines, as well as longer-term cash flow plans
- Control/approve expenses in line with forecast scenarios
- Make budget tracking more reliable with analytical allocations, re-invoicing, etc.
- Prevent financial risks (bankruptcy, fraud, non-compliance)
Beyond the different priorities and perspectives, it’s important that all the functions use the same reporting system for expense tracking so that all their objectives can converge.
A P2P solution helps you manage expense commitments by digitizing transactional processes, from issuing purchase requests to paying suppliers.
It’s easier to manage expense commitments when your business processes and organization are backed by P2P functionalities that generate a single end-to-end view of processes, from product and supplier listings and purchasing workflows to commitment and payment reports. These solutions also provide traceability for information and decisions on expense commitments, along with dashboards for easily tracking expenses and drawing up forecast scenarios.
The four keys to successful expense commitment management
- Design processes based on purchasing category (“No PO, no pay”).
- Determine a structure with each stakeholder’s roles and responsibilities, requiring collaboration between purchasing, finance and operations.
- Establish budget scenarios and rolling forecasts by purchase type and compare with actuals on EPM/BI programs.
- Use a Procure-to-Pay solution to automate transaction flows and give everyone visibility at the right time.
One or more of these drivers may already be implemented, depending on a company’s maturity level. Best-in-class companies have completed all four.
To sum up, finance and purchasing departments need to join forces and build expense commitment tracking systems that are more rigorous, structured, and based on shared policies.
The stakes can be quite high, and the results are quickly evident in terms of cash flow management, responsive and flexible purchasing oversight, and more reliable purchasing numbers in earnings forecasts.
For these changes to be cost-effective, they should be implemented along with Procure-to-Pay solutions to fully industrialize, digitize and share transactional and decisional information. And to ensure that everyone knows how important each step of the process is for ensuring data integrity, long-term change management measures must be conducted throughout the transition.
Written by:
Christophe Rivayran, Managing Partner and Source-to-Pay Expert at Fluxym
Olivier Rihouet, Partner, Digital Performance Management, Grant ThorntonHugues Rebellac, Senior Manager, Digital Performance Management, Grant Thornton