Don’t wait for an economic crisis before implementing expense management best practices. This article provides you with 3 savings tips you can implement today.
1. Minimize Expenses
2. Optimize Cash Flow
3. Review Existing High Value Contracts
1. Minimize Expenses
The simplest way to reduce your expenses is to reduce how much you spend. Some goods and services are required for your operation, but when we work with clients, we often see specific categories where there is a potential to optimize without impacting your operations.
Travel is one of the categories where we typically see savings potential, especially in larger organizations where travel expenses are high. All companies should have an actively enforced travel policy (revisiting it can yield significant savings), and larger organizations may also have a travel pre-approval process in place to keep expenses down. Travel managers should work closely with their preferred suppliers for airfare, accommodation/hotels, taxi/limousine, car rental services etc. to ensure that they are looking for the most economical and cheapest way to travel. Confirm with your travel agency that they have the most current version of your travel policy and that they fully understand the policy and objectives. Booking in advance and avoiding last minute bookings is key for savings. But of course, travel is just one expense category.
Entertainment is another high expenditure. As much as we may love entertaining our clients (which can be a necessity, depending on the nature of the business), monitoring this spend is crucial, by making sure staff don’t go overboard on extravagant tastes and that they are adhering to the Travel & Entertainment policy. Do you have frame agreements in place with your preferred entertainment providers? Defining and negotiating preferred vendors is an excellent strategy to better manage the entertainment category and this also gives you leverage when it comes to negotiating a contract with these vendors.
A quick look at Travel & Entertainment or similar categories can typically give you some immediate benefits, but more opportunities can be identified if you perform a structured spend analysis project. This is done by extracting invoice data and categorizing it into appropriate categories and then performing opportunity assessments within each category. In our next newsletter, we will look at best practices when it comes to spend analysis and opportunity identification.
For more ways on how to minimize expenses, or for help developing policy and procedures, please contact us.
“Travel is one of the categories where we typically see savings potential, especially in larger organizations where travel expenses are high”
2. Optimize Cash Flow
The value of payment terms often gets overlooked when the line of business negotiates contracts. If you take a look through your payment data, you may discover that you pay too early without getting any discounts (or don’t claim the discounts) or you may find that you are inconsistent or too generous with your payment terms. Payment terms tends to be industry specific, but most suppliers commonly agree to 30-60 days. If you are able to pay earlier, you can typically get a discount in the 0.5-2% range.
Investigating your payment performance and optimizing your processes to capture discounts can yield real savings. You can also discuss payment terms with incumbent suppliers, as some might be willing to give a discount for early payment. To set you up for the future, you should establish your own standard payment terms and communicate them on your website. Having a standard of e.g. net 45 days gives you a starting point for negotiating early payment discounts.
Here’s an example: Propose an early payment discount such as 2% net 10 days, or 1.5% net 15 days. If the supplier agrees, they will provide you with a discount on every invoice paid within the negotiated term (10 or 15 days). For a contract valued at $3M annually, this could be a savings of approximately $45-60K annually.
For more savings suggestions, please contact us.
3. Review Existing High Value Contracts
Certain contracts renew automatically or without any new quotation process – this is typical for licenses, communications, maintenance, custodial services etc. The world we live in is continually changing and it is important to review such contracts to ensure that you are still getting full value as pricing may have changed significantly, services may be outdated or negotiations could have been carried out hastily or by someone less experienced. Here are some tips on what to look for.
Services
Review the schedule of services in the contract and confirm with the business that the services being invoiced for are actually being used. This is especially important in IT contracts that typically auto-renew (software licenses, telecommunications, etc.) and bundled services. If you are not using all the services or paying a premium for out-of-scope work, you should renegotiate the scope to ensure that it aligns with your business.
Contract Management
How are contracts being managed? You could be paying for too many licenses or for services not being performed. Also, make sure the payment term provisions in the contract are checked against reality, as we have experienced cases where the discounts were not taken when a supplier has offered a 1% discount on all invoices if paid within 10 days. Confirm with your accounts payable department that the payment terms outlined in the contract are in the system. Lost savings can be the fault of poor contract management and/or lack of supplier integrity.
“Confirm with your accounts payable department that the payment terms outlined in the contract are in the system”
Pricing
Review the pricing schedule and look for volume pricing and rebates. Confirm that you are receiving the rebate cheques on time, as outlined in the contract, and that the amount is correct. You can request the supplier to provide breakdowns and itemized details.
Ask accounts payable for a few random invoices and compare them to the fee schedule included in the contract. Although this is the responsibility of the business prior to sign off, we have found cases where the line of business signs the invoice without detail attached or without checking the fee schedule, which is typically due to the trust that the client has built with the supplier over time.
Recent Comments