There is no getting away from it, one of the most immediate responses to the coronavirus pandemic is to manage our spending much more effectively than we might have done during business as usual.
In a recent article from McKinsey & Co, “The CFO’s role in helping companies navigate the coronavirus crisis”, the advisory company suggested, “the CFO and finance team can also bring some rigour to spending management by implementing rapid zero-based budgeting for all discretionary expenditures, such as indirect procurement.” In short, that means getting a grip on your credit card and procurement card spending.
And in our recent CFO Debate Live, with Dynshaw Italia, CFO of Soldo, he fully supported this approach stating, “it’s a top 3 priority, and critical to cash flow during a complete shift in spending behaviour.”.
So, let’s break down this expert advice and explain how you can bring rigour to your spending and act quickly during a crisis.
Indirect procurement is basically anything you buy for internal use by your internal team. Purchases include stationery, subscriptions, even hand sanitiser if you can find some to buy. Whilst this may be a small part of a business overall budget, indirect spend can be significant in certain categories and a “leaky tap that needs fixing” during difficult times.
Note: Direct procurement is something you buy to resell as part of your core business, including materials, stock, revenue-generating assets.
Indirect procurement can sometimes be seen as discretionary spending that budget holders own, therefore are allowed to spend on whatever they like. For example; work late pizza’s coming out of training budgets, or away day trips coming out of consultancy budgets.
During crisis times, we need to get better at spending on what we really need and thinking smart about all aspects of spend, so we have as much cash in the bank as possible to keep our business liquidity.
This is where zero-based budgeting (ZBB) can help, but it is not an easy thing to achieve unless you have the right systems.
Zero-based budgeting is the process of releasing funds to budget holders for specific functional activities and initiatives based on previous results and current needs. Nothing is assumed to be needed, hence the term zero-based.
This differs from traditional budgeting which normally starts with previously approved budget spend and flexed up or down by a fixed percentage, without looking at the real need for spending, and what value was created by spending this budget.
There are pros and cons to both traditional budgeting and zero-based budgeting, as Investopedia.com explains, “Zero-based budgeting can help lower costs by avoiding blanket increases or decreases to a prior period’s budget. It is, however, a time-consuming process that takes much longer than traditional, cost-based budgeting”.
The necessity to review detailed spend to assess value creation and performance can stump a lot of managers as they rely on systems reports and finance teams to manage the detail, but that is where investment in your systems can really benefit you.
While many managers see their procurement system as a transactional tool, a tool that simply processing receipts, invoices and payments, more tech-savvy managers understand the value of using spend data within these systems and tools to assess performance and aggregate spend. For example, a marketing manager using a specialist agency has led to a 10% increase in lead generation, versus 5% in a cheaper more general agency.
They can build their own understanding of their functions indirect spending activities, how this spend has helped generate revenues for the business and helps them justify their spend requests at budget time. And for budget approvers to consolidate cross-functional spend to gain better terms and pricing.
And at a time of crisis, that puts them and their business in a very strong position to invest in the most impactful initiatives.
Nick Levine, Finance and Strategy, is in a fortunate position working at Soldo, “I was able to use Soldo’s own spend management system to act fast, bring control and enforce or enable spend where needed.”.
Example of Zero-Based Budgeting
Suppose a company producing recipe boxes for home delivery, implement a zero-based budgeting process due to the coronavirus crisis.
One indirect procurement example could be; The company notices that multiple teams have started buying video conferencing licenses and other teams are buying reams of printer paper, via its procurement card system.
Instead of accepting this as ad hoc discretionary spend, the hybrid controller can intervene and consolidate spend at a company level thereby reducing the cost to the company by purchasing as one single Enterprise license for everyone. They could also buy a stock of printer paper, that employees can “call off” when needed.
One direct procurement example could be; The company notices that the cost of certain “pre-prepared” ingredients used in its boxes, made by a third party supplier is increasing by 5% every month.
Instead of accepting this rise and increasing the teams budget, the company could look at other suppliers, assess its own in-house capability, and decide to use its own team to make the “pre-prepared” ingredients at a low cost.
The important feature of ZBB to the assessment or the need, and making the right decision and action.
Tech gives you the toolbox to take action
As you can see, Zero-based budgeting is a more granular process that aims to identify and justify expenditures, but without a tool that gives you data granularity and a way of categorising and controlling the spend, the cost/benefit of these interventions may be too low to be a real priority.
However, a combination of good tech and a rolling “spend performance” conversation with the budget holder can help change your business approach to discretionary spend and help the business thrive.
Dynshaw concludes in his interview about life in startups and working at Soldo, “Working in a high growth company means you have to be adaptable, and you have the opportunity to bring processes and use tools that scale, rather than work with legacy tools, this makes all the difference when managing cash and spend.”.
And whilst ZBB can be seen as a way of reducing spend with little benefit to the business, it can be overcome by taking the “Goldilocks” approach, meaning, making conscious decisions and actions that lead to the best outcomes, by allowing spend that is not too much, or too little, but just right for the business need.
Which is just what is needed during coronavirus, and is likely to become the best practice for many businesses for the foreseeable future.
This blog was co-authored by Nick Levine, Strategy and Finance at Soldo, and Christopher Argent, Strategic Consultant, Generation CFO.
Soldo is a spend and expense management platform, complete with Mastercard® cards, intuitive admin and effortless reporting. Their mission is to simplify the entire business expense cycle, from beginning to end. We use the smartest financial technology to solve the three key business spending problems: delegation, control, and reporting. Learn more here
A proud Community Partner on the GENCFO Tech 100. The all-in-one spend management platform that allows you to take control of spending with budgets for every employee, department, and project. You will be able to control every cost with custom budgets, track transactions in real time, connect accounting software to automate reporting to save hours and use insights to grow.