Talk to any finance director and they will readily admit that some budget holders are far better than others in managing their spending processes, which really is not surprising.
A budget holder by definition is a senior manager or director of the business. These people won their responsibility by being good at their job – whether IT, marketing, HR, sales etc. – and almost without exception have never had any formal training on best practice to excel in the procurement functions and the associated financial checks and balances..
The budget holder’s perspective is often that their budget is there to be spent as they see fit. The finance function is there to support them with budget availability information and making sure that the suppliers get paid.
The problem is that far too many budget holders simply do not have the experience or the tools to enable them to maximize the effectiveness and control of their spending. Whilst most will be very diligent in the purchasing process for larger items of spend, very little if any attention is given to the day to day items and this approach is often defended by the savings that could be made simply don’t justify the time it would take to achieve them.
This lack of diligence /process is highlighted by the failure to formally record a purchase, follow the corporate approval limits, use corporate purchasing T&C’s and standardize on suppliers for common items across departmental boundaries for better pricing. Term agreements often renew automatically without review or consideration of the budget implications. This is often highlighted by budget overspend as the budget holder is ineffective in tracking all the committed spend of their department.
This lack of process results in finance finding out about corporate spend when the purchase invoice arrives and it often takes a seasoned AP clerk to work out which budget holder was responsible to enable approval. You then have to ask the question how the budget holder is approving purchase invoice for payment when it is abundantly clear that they have nothing readily available to validate that the invoice values reflected what was verbally agreed let alone audit that the supply has taken place. If it looks about right, it gets signed off (eventually) and then paid.
For many budget holders, if a hard look was taken at their performance in the procurement and finance process, you would conclude that they were not fit for purpose.
In the budget holders’ defense, this is not surprising. They have never been trained for this aspect of their role yet they are expected to design, develop and then control their department’s internal processes usually using email and spreadsheets as their primary tools. These home grown processes are cumbersome, time consuming and for many, as ineffective as they are inaccurate.
As with so many aspects of every business, it falls on the finance director to both recognize the problem and come up with a solution because the budget holders will never all get together to resolve the problem. More problematical is that those same budget holders often don’t even recognize there is a problem which strengthens the argument that a corporate budget can be used entirely at their discretion.
The solution to aiding budget holders to adopt strong corporate disciplines, improve the effectiveness of their spend and maximize the potential of their budgets is called Purchase to Pay automation.
Purchase to Pay (P2P) software is readily available both as a cloud or local deployment and has become very affordable in the past few years.
Purchase to Pay enables the automation of the entire purchasing cycle from selecting suppliers, getting competitive quotations, formalizing the approval process, providing real-time budget checking, generating formal purchase orders with the relevant T&C’s, addressing receipting where relevant, simplifying the capture of the purchase invoice (or automating this completely with e-invoicing), automating the approval process whilst being tightly integrated with the accounting / ERP software.
The budget holder gets the tools to make all their purchasing effective and accurate whilst the finance director gets 100% visibility on all corporate spend, full commitment accounts, fully automated budget management, huge productivity savings and the ability to remove all the paper from the purchasing process.
For this to happen, the finance director has to pick up the reins to start the process of addressing the bigger picture and avoid the tunnel vision of just simplifying purchase invoice approval automation because it just makes a bad process more convenient.
But picking up the reins is just the beginning, and seeing the bigger picture is dependent on effective budget holder management. Find out how to implement it and get your teams working together by downloading our guide.