Budget Management Best Practices
Budget management refers to managing the revenue and expenses of a company or internal department over a specified, future period. For instance, the finance team may set forth a quarterly budget that internal teams need to abide by; as a result, the team manager will control expenses, grow sales, and find cost savings according to that budget.
Procurement is a key function for budget management both internally and externally. Budgeting within the procurement team is one thing. However, procurement activities and strong procurement practices can easily make or break the company’s overall budget. Here are some best practices for managing your procurement budget and helping the company stay on track.
The importance of procurement for budget management
Procurement is a business function that is integrated into virtually every aspect of the way the company operates. Procurement, obviously, creates the product or service that the company sells. But, it also provides the office supplies, technology, and even the utilities that the business needs to run on a day-to-day basis. Indirect spend — those budget categories that don’t directly pertain to the manufacturing of goods or services — still needs procurement to function.
As a result, budget management in procurement should be viewed as both integral to the company’s financial success and as a separate management category. The procurement team needs a discretionary budget; and, strong procurement practices will help keep the entire company within budget and build a healthy profit margin.
A key challenge in budget management for procurement lies in the way procurement and financial teams communicate. Take, for instance, cost reduction. For procurement teams, cost reduction is an important goal. But, finance will not see cost reduction with the same lens as procurement, unless it hits the P&L.
There is obviously still value in procurement saving money through cost reduction, which the organization can then spend on something else. But finance will consider it a value-add, rather than pure savings. A recent report found that nearly half of finance leaders believe that only 20% or less of procurement savings are shown in the bottom line.
It’s critical for senior leadership to understand the pivotal role that procurement plays in budget management. Without this recognition, finance and procurement teams will resist alignment on implementing best practices that help the overall organization grow sustainably.
Creating a budget for procurement
Budget management for procurement is twofold. First, procurement teams must work to create and maintain their own budget. This includes predicting costs such as procurement technology, staff salaries, and other costs associated with the sourcing process.
Perhaps more importantly, procurement must manage the budget for purchasing materials for other departments and operations. A formal budget should be established to create transparency across all departments, as well as for finance to understand where to find savings and prepare for price increases.
This is where a procure-to-pay system can help.
Procure-to-pay and budget management
A procure-to-pay system integrates purchasing and accounts payable. Digitizing procure-to-pay helps accounting teams better manage cash flow and optimize financial decision-making, making budget management easier. Here are some ways that procure-to-pay tools can supercharge procurement’s contribution to budget management.
Manage multiple budget types
P2P systems are able to offer a wide range of functionality, allowing procurement teams to manage multiple budget types. This can include operating expense budgets, project-based budgets, and contract-based budgets. Likewise, automation built into these systems streamline the budget management process. P2P software automatically matches spending to budgets based on purchasing information such as cost centers, GL accounts, or project number. This gives procurement teams a clear picture of real-time spending against set budgets.
Integrate with financial and accounting systems
A P2P and ERP can help teams monitor budgets across multiple locations, consolidate spend, and cut down on maverick and rogue spend. For finance teams, ERP and P2P systems can provide more accurate financial reports and streamline the approval process. Accounting teams can check purchase order requests against the budget in real-time to make sure spending is being managed against projections. If a procurement category is reaching its budget limit, administrators can create a hard stop to ensure there are no costly overruns.
Get a detailed view of past spending
Strong budget management requires a clear picture of past spending. Historical spending is used to forecast future spending. Therefore, if procurement doesn’t have a centralized, transparent view of where the budget is going, forward-looking predictions won’t be accurate.
Procurement software can help illuminate where the budget is going on a monthly, quarterly, and yearly basis. Fairmarkit breaks down spend data by category and highlights strategic versus tactical sourcing opportunities, as well as supplier performance. This helps procurement and finance teams cut down on expensive tail spending and optimize resources, ultimately driving better financial performance.
P2P systems are vital to budget management, not only for procurement, but across the entire organization. To learn more about procurement budget management, check out our blog, The Source.