Once a business reaches a certain size it’s spending habits can spin out of control. Costs tend to be sticky. Let me illustrate what I mean by sticky with a simple example…
You want to get in shape, so you join a gym. The monthly fees are billed on your credit card. It is very reasonable. You actually go to the gym and use it! So far so good. Then you get busy and stop going. You hardly notice the small fee on the gym costs every month and you tell yourself that you plan on going back, and you don’t. Months and months go by and the gym gets your monthly fee. That’s a sticky cost.
Now, think about your business. Maybe it is a software cost – a small subscription for software you once used and now don’t. That’s a sticky cost.
How about a new hire? People that you hired when business was booming and now business is not, and you don’t need that extra staff, but you certainly don’t want to let good people go. To be clear, I am not saying to go fire all those people! What I am saying is that this could be a very, very high sticky cost that you have.
Now, I want to talk about your spending processes and make some recommendations on how you can gain control of your business spending habits.
Your Spending Processes
For a business with a few departments let’s look at an example of your spending process –
- You or your department heads discuss what you need to spend money on
- Various people in different departments order goods and services from your suppliers
- Your suppliers deliver the goods/services
- A bill comes in
- The bill is sent to a department head for approval
- The bill is paid
So, what is wrong with this?
A few things.
Firstly – Unauthorized Spending
Over time, stuff gets ordered in advance with no approvals at all. Authority gets delegated and people order stuff. This means you have zero control in advance on spending habits. Did you need this? Is there a better supplier? Even worse, could there be fraud?
Keep reading below for how to fix this.
Secondly – Chasing Down Bills
Bills will drift into your company through various means – some emailed, others snail-mailed, maybe faxed.
This process means you are flying blind in your business as bills are not entered into accounting in a timely manner.
There are two bottlenecks here:
- The time it takes to get bills in when you have given your vendors different ways to communicate with you
- Bills sit on people’s desks awaiting review and approval
I have recommendations for this below – keep reading. 😊
Here are the main issues with this “system”:
- No control over spending resulting in over-spending and even possibility of fraud
- Slowness of data entry as accountants chase down bills from suppliers and approvers resulting in you flying blind for weeks not knowing what your accounts payable are!
A Typical Purchase Order System
To gain control over spending many businesses initiate a Purchase Order system, then get frustrated and give up because of all the extra work and bottlenecks.
It goes like this. A requester – someone you have delegated spending authority to (with limits) – creates a Purchase Order (could be inside the accounting software, or it may be outside it).
The Purchase Order is then given to an approver (could be Department Head, or CFO, or CEO, or some combination) to review. Once the Purchase Order is approved it is likely emailed to the supplier.
Then the bills come in.
The problems are this:
- Matching manual bills to Purchase Orders can take a lot of extra time!
- Bills are approved for payment without matching to Purchase Orders so effectively the whole purpose of pre-authorized spending is lost;
- The bottlenecks as outlined above are worse as now Purchase Orders and bills must be approved;
- Because of the bottlenecks, the issues of timing are magnified – no idea what your spending commitments are, bills dribbling in, and documents awaiting approval sitting on people’s desks.
Because of the extra time involved often businesses that have this kind of system, either end up paying lip service to the Purchase Orders – just madly signing off with no review, or people just stop doing them and bills come in, and they are approved after the fact. In other words, people just stop following the system and it falls apart.
It is not that they are bad people – it just seems to take so much extra time to pre-approve, and then match bills to Purchase Orders later takes time. Then you have to sort out all the discrepancies!
A Better Way
Cloud-based, paperless systems can completely transform the system above and actually save you time.
First you need a simple, inexpensive technology platform to do this (we use this system below for many of our clients at ControllershipPLUS).
Here are the main components of the software we use (all online in the cloud):
- Approval software
- Accounting software
- Document extraction software
- Online bills payments software
This is how it works seamlessly as a whole:
Part 1 – A Purchase Order is Created
- A requester creates a Purchase Order (you can set it, so they only see their department and account codes) inside the Approval software. This is a user that does not need to be inside your accounting software;
- The Purchase Order is automatically routed to the approvers you have set inside the software. They get email notification and can approve the Purchase Order either by clicking a box in their email that takes them to the software, or through the internet, or using a Smartphone app. We can set up multiple levels of approval to different people depending on the spend authorizations pre-set in the system/software;
- Once approved the Order is automatically sent to the supplier;
- Now the Purchase Order is automatically pushed to the accounting software.
Part 2 – Bills Are Matched to Purchase Orders and Approved
- All bills from suppliers are now sent to accounting via email. I want to stop here and say this – what this means is that ALL bills can be sent to accounting via email and ALL bills pre-entered into system. Right there you can see the beauty of this system – 100% of bills are now captured on a daily basis inside your accounting system. Compare that to the typical system where bills are not entered into the system until they have been approved by someone! You can do this for one main reason – the Purchase Order was pre-approved, and the bills are recorded as draft;
- Ok, now that all bills have been pre-entered as draft bills inside accounting, they get pulled automatically into the Approval Software;
- The approval software will now automatically match those bills to outstanding Purchase Orders;
- Then the approvers inside the approval software will approve the bills on 2 levels:
- Were those goods and services actually received?
- Are the amounts correct in both quantities and price?
- Once approved bills are now automatically updated inside the accounting software and move from draft to “ready for payment”;
- Approved bills are paid online.
The elegance and beauty of this system is that:
- Notice how often I use the word automatically in the steps above. This is the main reason this system saves you time. It also saves paper and paper chasing;
- Everything is done online, which means no bottlenecks of paper sitting on people’s desk! The alert reader may be asking – but what about unapproved Purchase Orders and bills? Is that not still a bottleneck? Yes, it is. The difference is that with online approval software you can see with an eagle’s eye view exactly on whose “virtual desk” they are sitting and nudge them!
- Expenditures are approved before someone actually orders stuff! This give you total control over spending;
- Fraud is virtually avoided by the matching of bills to Purchase Orders;
- All bills are recorded immediately so that you know exactly what you owe at all times! This is huge;
- Also, you can see what you are committed to spend (before bills come in) by running an open Purchase Order report. This is huge too!
- No paper has been printed. I repeat, no paper has been printed. Each document passed through each step as a PDF. No cheques are printed. This saves a lot of time.
If you have out-of-control spending in your company, let us know, we can help, and make 2019 the best year ever!
Thanks for reading…