Why Spend Management Outshines Expense Management: Key Differences

The difference between spend management and expense management can often leave people confused. While they are not entirely separate concepts, this blog aims to clarify the key distinctions and similarities between the two terms.

What is Spend Management?

Spend management is a strategic approach to optimizing a company's spending. It focuses on achieving cost optimization across various business functions and ensuring maximum value for money. However, spend management goes beyond expense management.

Spend management involves optimizing spending in different categories, including procurement of goods and services, vendor contract negotiation, forecasting future costs, budgeting, and utilizing corporate cards with intelligent approval systems for employee expenses. Utilizing spend analytics techniques to manage spending in line with industry benchmark rates is also a crucial aspect of spend management.

What is Expense Management?

Expense management involves monitoring and controlling the expenses incurred by an organization to optimize costs and ensure compliance. It encompasses tracking and budgeting various expenses, such as employee expenses, office-related costs, travel expenses, and other operational expenditures.

The steps involved in expense management typically include expense tracking, reimbursement policies, approval workflows, and financial reporting. Effective expense management enables companies to manage expenses efficiently, identify cost-saving opportunities, and gain insights into spending patterns at both the organizational and employee levels.

Implementing good expense management practices involves establishing clear reimbursement and pre-approval policies for employees, setting strict spending limits, creating budgets, analyzing expense records against budgets, and conducting regular audits.

Spend management vs. Expense management: Key differences

Scope 

Spend management covers all company expense processes, including procurement and vendor management, while expense management primarily focuses on tracking and recording employee expenses such as travel and office supplies.

Timing of Spend

Spend management encompasses past, present, and future expenses, with regular audits, spend analytics, smart approval policies, and forecasting and budgeting for future expenditures. Expense management primarily concentrates on tracking and analyzing already incurred employee expenses and ensuring accurate accounting.

Function Type

Spend management is a strategic function that prioritizes cost optimization, better vendor contract negotiation, identifying cost-saving opportunities, and implementing strategies to achieve the company's financial goals. Expense management primarily streamlines employee expenditure and reimbursement processes to ensure better control and compliance with company policies.

Business Functions

Effective spend management requires collaboration among various business functions such as procurement, finance departments, and different cost centers within the company. Expense management generally relies on the cooperation of individual employees and their respective business heads.

Challenges with Expense Management

Expense management alone cannot effectively optimize spending for your business. Here are some common challenges associated with expense management that can be addressed by implementing spend management:

Limited visibility into spending trends:

Expense management often provides insufficient visibility into spending trends as expenses are accounted for after purchases have been made. This can result in missed opportunities for significant cost savings and policy optimizations.

Policy non-compliance:

Employees may disregard or deviate from expense policies, leading to non-compliant purchases. Traditional expense management systems offer little protection against such occurrences.

Inadequate vendor management:

Expense management may involve employees making purchases from various vendors without considering vendor compliance or securing the best deals. Poor vendor management can result in financial losses and give rise to legal and compliance issues.

Lack of future planning:

Expense management primarily focuses on recording expenses after they occur. While it aids in budgeting, it fails to assist in long-term planning and forecasting future expenses.

Why Spend Management is Important

Most companies utilize expense management in their business for accounting control. While expense management helps them set up controls and guidelines for effective reimbursement processes, it is important to optimize and control these costs even before they take place. 

In today’s business environment where optimizing spend is gaining importance, spend management holds significant importance as it enables companies to optimize their future expenses, secure better deals on vendor contracts, identify cost-saving opportunities, and improve accounting procedures. It serves as a long-term financial plan for the company.

Challenges of Spend Management 

Implementing spend management in your organization can be a challenging task. Here are some common challenges companies face while implementing spend management: 

Cleaning data

If your organization has non-centralized spend data in different formats within each business unit, implementing spend management is going to be difficult. You have to ensure that all spend data is present in a secure and accessible location in a standard format. This can take up a lot of time for your data analysts to do. 

Email and offline approvals

If your company manages expense approvals via emails, texts or phone calls, implementing spend management is going to be challenging. Keeping track of long email approval threads and text messages can make documenting data a time consuming process, and the data of in person or phone call approvals might be lost forever. Oftentimes, approvers might have approved an expense without required context leading to further gaps in your spend management process. 

The Role of Automation in Better Spend Management

Automation plays a vital role in efficient spend management. Real-time spend analytics and reporting are essential components, making automation a non-negotiable aspect of spend management. Spend management software facilitates automatic expense tracking on a cloud-based platform and implements streamlined approval policies, allowing for quick approval of expenses.

Understanding the differences between spend management and expense management is crucial for businesses to effectively optimize their spending, control costs, and achieve their financial objectives. By implementing the right strategies as well as utilizing automation tools, organizations can streamline their financial processes, gain insights into spending patterns, and drive greater cost efficiency.

Accounts payable automation software, such as ClearTech, provides real-time insights into spending, alerts for abnormal expenditures or cost increases, and suggests more economical alternatives for vendor spend. ClearTech also helps identify "zombie spend" and negotiate better deals with vendors through their expert buyers.