When running a small business, there are many tasks an owner must undertake to ensure the financial health of the enterprise. Managing spend is second only to generating revenue in importance. Yet, spend management is not about cutting costs; it’s about making smart, informed decisions with the money you spend. Businesses that prioritize proper spend management as early as possible are more likely to grow efficiently and make better financial decisions.

Without a clear spend management strategy, your company can find itself relying in inaccurate data, which can put a strain on cash flow and sustainability. Small business owners can face a wide range of financial challenges, including unexpected expenses, irregular cash flow, and lack of visibility regarding spending. Further complicating these issues is the often-necessary balancing act of wearing multiple hats, including responsibilities around sales, marketing, customer service, and more. These issues often lead to a reactive approach around spending and reduce profit margins and growth.

Whether you’re in the early stages of planning your business or have been in business for years, understanding how to track and control your spending can help set the foundation for long-term success.

The sooner you incorporate spend management practices, the better off your business will be. According to a CB Insights report, 38% of startups fail due to a lack of financial discipline and eventually running out of cash. These challenges don’t abate as businesses mature. The XXX indicates “lack of cash flow” as the number one reason businesses of any age fail.

So, how does a business begin to properly manage their spend? Here are some valuable spend management strategies every business should implement. In addition, you should consider spend management software for tailored for small businesses to streamline and optimize your processes.

Start with a Thorough Spend Analysis

As a small business owner, you need to understand your expenses before you can manage them. This begins with conducting a spend analysis – a systemic assessment of your current expenses to find inefficiencies and areas fit for cost reduction. Tackling the issue of spending proactively enables you to identify unnecessary expenses before they spiral out of control.

Actionable Steps:

• Collect Historical Spending Data: Review 6-12 months of past expenses. This gives you a baseline understanding of where your money has been going.
• Categorizing Your Expenses: Break down your spending into categories like rent, utilities, employee salaries, office supplies and marketing. This will help you spot trends such as certain months where spending peaks or areas where you may be wasting money. Using a simple Excel spreadsheet can be a good start for organizations lacking advanced software.
• Rank Costs by Priority: Some expenses are more important than others. An important step on getting a better hold on expenses is determining which expenses are critical and which ones can be postponed or eliminated. Ranking and prioritizing can provide immediate insight into what your small business must have and what it can live without.
• Identify Redundant Spending. Many small businesses will find redundancies during a spend analysis. If unnecessary costs are found, it’s easy to eliminate them if expenditures in another area already address a similar need.

This analysis should form the basis of your spend management strategy. It provides guidance on areas to cut costs and where best to allocate spending going forward.

Set Clear and Measurable Financial Goals

The next step after conducting a spend analysis is coming up with financial goals. According to Forbes, setting financial targets for your small business should be guided by the overall business strategy. These targets should pass the S.M.A.R.T test: specific, measurable, attainable, relevant, and time-bound. Trying to control your spending without specific financial targets is a waste of time.

Actionable Steps:

• Set Key Performance Indicators (KPI): KPIs are quantifiable measurements to guage performance overtime. Examples for spend management include cutting down discretionary expenditures, enhancing net operating cash flows, or achieving a target net profit ratio. These KPIs will take a center stage when making spending decisions and will help when formulating policies.
• Establish Policies Based on Goals: For example, let’s say one of your goals is to cut down on excess spending. Your policies may then stipulate that non-essential items must go through a more rigorous approval process before purchasing.
• Ensure Goals are Attainable: Establishing goals are a critical component of any business, regardless of size. It’s important to remember that any goal must be realistic and attainable, as regularly missed KPIs can dampen confidence and enthusiasm among team members.
• Set Realistic Timeframes: In addition to being attainable, goals must be achieved within a realistic timeframe. Incorporating deadlines that arrive too quickly or are too far into the future can both restrict your team’s ability to realistically achieve said goals.

Providing clear direction allows your team to know what’s important in terms of the company’s financial goals and how the company intends to achieve them.

Identify and Invest in the Right Spend Management Software

Now that you’ve reviewed your spending and goals, it’s time to choose the right tools to manage them effectively. Spend management software can help you shift from a reactive approach—where you’re scrambling to address issues after they arise—to a more proactive strategy that keeps you in control from the start. By using the right tools, you can monitor, control, and optimize your spending in real time, preventing errors and surprises before they happen. This approach not only saves time but also allows you to focus on more strategic activities that help grow your business.

Small business owners might be overwhelmed by options. When selecting spend management software for small businesses, it’s best to choose a platform that meets your specific requirements.

Actionable Steps:

• Identify Key Features: Good spend management software should support integrations with your existing applications you might be using for accounting processes and should allow for customized reporting. Built-in controls and real-time tracking will also help you prevent unauthorized spending and remain on plugged in to employee expenses as they occur.
• Consider Scalability: As your business grows, your software must scale with it. Look for a solution fits your budget and also has the capability to handle different spend management use cases, such as reducing employee-funded expenses or tracking cash-based expenditure. .
• Ensure Ease of Use: The more complex the system the more frustrating it will be to implement, requiring extensive training or time-consuming setups. If you have employees on the road or in the field, ensure there is an intuitive mobile app or mobile-optimized experience to make compliance easy.

Implement Strong Spending Policies

Good spending management is a direct result of strong spending policies. These policies act as boundaries that prevent unnecessary spending, reduce instances of fraud, and help ensure compliance with your company’s financial goals. This is critically important, as a recent study indicated that 42% of fraud in small businesses resulted from a lack of controls.

Actionable Steps:

• Establish controls: For bill pay expenses, introduce a simple approval process to reduce the risk of fraud. For employee expenses, establish spending limits and require receipts for every purchase.
• Categorize Purchases: Identify what can and cannot be purchased using business funds. This might include allowing purchases for office supplies but not for food.
• Use the Software to Enforce Policies: The best part about spend management software is that it can do some of the work of enforcing these policies for you. Features like spending limits, approval workflows, and automatic receipt capture helps prevent unauthorized spending before it happens.

With these policies and the right tools in place, your business will be equipped to handle its spending responsibly.

Train and Involve Employees and Other Stakeholders

To succeed, spend management implementation requires that all stakeholders understand and follow new processes. This includes implementing staff training as well as education around adopted spending rules.

Actionable Steps:

• Provide Training Sessions: Ensure that all team members know how to use the software and understand the company’s financial goals and policies.
• Encourage Feedback: Ask your employees to provide feedback on the new software. This improves buy-in while also possibly improving potential trouble areas.
• Ensure Accountability: Once team members are trained and are positioned as stakeholders in your company’s spend management initiative, they should also be accountable. Accountability in finance-related matters, regardless of company size, requires serious focus among team members.

Involving employees in the process, creates a sense of ownership among staff while also fostering a culture of financial responsibility across your organization.

Proper Spend Management Strategies Help Small Businesses Succeed

Incorporating effective spend management strategies in your business involves thorough spend analysis, setting clear financial goals, setting strong policies and training your employees on how to control spending. By being proactive and adopting these strategies early on, your business will be better positioned to practice financial discipline, improve cash flow and ensure sustainable growth.

Don’t wait until cash flow problems arise—manage your costs now! In managing expenses, Profit can help your business streamline spending and put you on the right financial track. Contact us today to see how Profit can help your small business.