6 Places Your Purchasing Process Is Leaking Cash (& How to Stop It)

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“Our best-case scenario, maybe we’re 60 to 70 percent revenue by the end of the year. And that’s just a break even — and only that if I’m not paying my debt service,” says Elliot Nelson, owner of McNellie's Group, which operates 20 restaurants across Arkansas and Oklahoma.

McNellie’s Group faces the same reality as all businesses trying to reopen in the midst of the COVID-19 pandemic.

Revenue is down. Expenses are up. Carelessness with cash is not an option.

After speaking with hundreds of finance teams across the country, we know that a weak purchasing process unnecessarily leaks cash out of your business. Below, we’ve compiled our findings to help you identify top areas where your current purchasing system might be falling short and determine how a comprehensive, software-driven purchasing platform can plug the holes and turn purchasing operations into a strategic advantage.

If you’re just starting to get your business off the ground, or interested in learning more about how to centralize your company's purchasing and payments, we would love to chat.


Maverick spend and a lack of formal purchasing process


Maverick spend, or any company purchase made outside of a formal purchasing process, is a leading culprit of wasted cash in purchasing. The goods and services bought through maverick spend aren’t necessarily a problem, but the process always is.

When you throw a few office supplies into your cart during a quick store run or an employee subscribes to the latest productivity app, those purchases aren’t typically tracked. There’s no data to tie the spend to the purchase. Finance doesn’t know where the money went. If finance can’t match spend to purchase, it can’t properly close the books. And this is how maverick spend becomes one of the biggest bottlenecks in your business.

While you don’t want employees tied up in company bureaucracy just to order some pens, research suggests employees don’t always make the best decisions when granted unchecked authority to make purchases. 19% of employee spend is fraudulent. When nearly one out of five employee purchases is fraudulent, giving employees free rein to make unsupervised purchases can be a problem.

purchasing process stat

As we illustrated in the examples above, maverick spend starts with that lack of a formal purchasing process. A recent Hackett Group study found that around half of all companies had no formal purchasing system for their employees to buy supplies and services. Without a formal system in place, employees don’t have to seek approval for purchases, purchases aren’t tracked, and budgets aren’t enforced.

Cozen O’Connor, a large law firm with 29 offices around the world, ran into this exact problem. Its 400+ employees were making office-supply purchases as needed, without any formal purchasing process or tracking system in place. With buying decisions distributed across the employee base, the firm had no ability to analyze spend per product, location, or category.

But within 24 hours of implementing software to track and manage spend, the firm identified savings opportunities of 10%. Compared with its maverick spend days, the firm is now saving $5,000-$6,000 per month on products alone.

The solution to maverick spend starts with a robust purchasing process. Your purchasing platform should include a single, centralized catalog, and each purchase must flow through that platform. Employees shouldn’t be allowed to make purchases outside of the system. The end of maverick spend starts with you helping employees make purchases the right way.


Weak oversight of vendor performance


According to an SCM Dojo article, businesses procure more than 40% of their items from suppliers without a formal contract in place. Even if you are unique and you execute contracts with 100% of your suppliers, you may never check to see whether your vendors comply with all of the fine print.

If you don’t audit pricing and delivery schedules against contractual requirements or track vendor performance for the purpose of shopping for better options, you could be overpaying and leaking more cash in the process.

The purchasing process you put in place to control maverick spend should do more than just consolidate purchasing. Your vendors should also upload their catalogs into that system so you can run reports by vendor. This will allow you to track pricing, contractual compliance, and other metrics to ensure that your vendor base is the right fit for your business.

NY Kids Club consolidated its purchasing process into a single system, and the real-time analytics immediately impressed them. Digging through the data allowed the business to better track vendor performance. After doing so, NY Kids Club optimized those vendor relationships and saved $75,000 in the first year alone.


Poor administrative systems


When you think about the historical approach to business purchases, you likely include items such as quotes, purchase orders, order confirmations, invoices, and receipts.

Thankfully, this document-intensive back-and-forth has now moved mostly to a digital format. But that hasn’t cut back on the number of required documents. QX Software Services found that a business purchase creates (on average) five to seven documents.

If you don’t keep up with these documents and ensure that they’re accurate, they’re useless. In fact, the very documents meant to protect your business can become the bane of your purchasing process and lead to wasted time, overspend, and more leaking cash.

An effective purchasing system consolidates the entire process into a single platform. From quote to invoice, every purchase is approved, recorded, tracked, and paid in the same system. The QX Software study we previously mentioned found that implementing a purchasing system can reduce costs by up to 50%.

From a documentation standpoint, San Francisco-based catering company ZeroCater reduced the number of invoices generated “from 200 invoices a month to maybe 3 or 4” with such a system. This one change cut down on the many tedious hours spent reviewing invoices while creating a more efficient system in the process.


Missing budget controls


Budgets are a given in the business world. Your employees expect them. You count on them as a road map for the next month, quarter, or year. It’s unfortunate that this budget-guided mentality doesn’t always make its way into the purchasing process at many companies.

A McKinsey study found companies that don’t actively control their tail spend with budget controls miss out on savings between 5% and 15%.
Purchasing is a key budget item. Likewise, budget controls should be a key element in your purchasing system. Integrate budget controls into your purchasing process with software that can enforce preset rules. These rules often establish limits for spend by employee and department. You can also set spending caps for specific vendors and categories.

MINISO USA, a Japan-based designer brand, struggled to know how much of the overall budget their departments were spending since there was no spend visibility. Through a single purchasing platform, the company set budget limits for each of their stores that were all easily visible in the purchasing dashboard.

As a result, the operations team can now see the amounts being spent by department, control the overall budget, and have a solid answer for accounting every month.


Accidental orders


Whether it’s incorrect quantities, wrong part numbers, duplicate orders, or some other error, accidental orders remain a common purchasing mistake. It may sound odd that a software platform can prevent typos in the purchasing process or eliminate duplicate magazine subscriptions for a single waiting room, but it can.

Any worthwhile purchasing process will automate checks and balances. You should be able to set up hierarchies of purchasing approvals. Let’s say you want your IT department to approve every department-related purchase. Employees should shop for every IT purchase, from mobile apps to new computers, through a single catalog.

Then, each purchase request should be funneled to the IT department for approval. Maybe you want to set up different thresholds within this IT approval process (e.g., an IT manager can approve purchases under $100, whereas IT purchases $100+ require approval from the VP of IT). Your system should allow this as well.

That same system should also allow you to audit purchases to check for errors, such as duplicate orders or overcharging. If your platform does nothing but eliminate accidental orders, you’ll have bested one of the most common culprits of wasted money in purchasing.

Be Relax, a global spa with 40 locations across 11 countries, adopted a software platform to bring control to a chaotic purchasing process. Before implementing the platform, managers bought supplies as needed and used company credit cards for purchases above a certain dollar amount. The company couldn’t enforce budgets, approve or deny purchase requests, or implement spending policies per location. Now, the platform enforces programmatic rules to ensure that each location stays within budget, purchases from approved vendors, and doesn’t place orders for unapproved items. It’s now impossible to make a non-compliant purchase.


Manual processes


A BCG study found that nine out of the top 20 Fortune 500 companies listed digital technologies as a critical element of their purchasing process. That’s because digital purchasing systems eliminate many problems that can arise from manual processes.

Manual processes are error-prone, time-consuming, and difficult to repeat. If you want to scale your business, your purchasing process must scale, too.

Digital purchasing platforms eliminate problems caused by manual purchasing processes. Human error is replaced with rules-based, automated systems. Time spent calling vendors, tracking down approvers, and gathering receipts is unnecessary when all purchasing is consolidated in a single, end-to-end system. And instead of following a different ordering procedure for every unique supplier, a single platform means a single, repeatable purchasing process.

Zenergy, a cycling workout company, was looking to scale its business, and manual processes were holding it back. When it ditched pen-and-paper purchasing and switched to a software-based solution, Zenergy reduced its purchasing time from 8 hours to 20 minutes.

Zenergy founder and CEO Nick Staples recalls: “It was nearly impossible to keep up with the growth we [had] planned, and the status quo wasn’t feasible.” By removing manual processes, Zenergy was able to expand from 4 locations to 19—an impossibility without an effective purchasing platform.

Could purchasing be your secret weapon?

For businesses reopening in the wake of COVID-19, a purchasing platform should be a top priority.

[solidcore] is a health and wellness company that recently scaled from 25 to 50 locations. To double its footprint, regional manager Artemis Benedetti recalled that a streamlined purchasing platform was necessary.

“[Purchasing] was a mess. We had multiple user accounts on Amazon and also used Wayfair and many third party vendors for wipes, cubbies, sweatbags, etc. We were logging into accounts one at a time, shared logins, and had issues with passwords. . . . Without . . . consolidated ordering we wouldn’t have been able to open the number of studios we have today.”

Stop thinking of purchasing as an unwelcome overhead expense, and adopt a platform that will propel your business to the next level.

If you're ready to plug your leaky cash flow with a new purchasing platform, sign up for a Negotiatus demo today.

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