Spend management is a basic business practice that seeks to keep track of how a company uses its money to help managers in taking timely measures whenever and wherever needed.
Nowadays, technology has replaced ledgers and manual reports with AI-powered software that can create dashboards and insightful reports while providing tools to optimize the day-to-day operations of a business.
A spend management solution can be a powerful ally in a startup’s journey to scale as it can lead to positive profitability faster while helping founders to progressively reduce the business’s cash burn rate.
In this article, we dig deeper into five reasons why spend management is so important when a new business is starting to grow at a fast pace.
#1 – It helps keep your cash burn in check
Startups are capital-intensive ventures that require significant amounts of money to lift off. Typically, a prototype needs to be built, a team needs to be enrolled, and the proper infrastructure needs to be in place for the business to function.
Since the company is not yet making any money, all of the capital that comes in is burned – in some cases, at a fast pace.
With this in mind, founders can use spend management software to optimize how cash is used by prioritizing expenditures, analyzing potential budget deviations, and ensuring that everyone involved in the process of disbursing money is aligned with the company’s goals.
#2 – It strengthens internal controls
Most spend management platforms these days allow users to assign different permissions and roles to individuals within the organization to ensure that every expense is being reviewed and approved by someone who is qualified to do so.
The founder of a startup typically wears many hats and time is not abundant when something is being built from scratch. With this in mind, spend management software facilitates the process of keeping the company’s finances properly secured and reduces the odds of theft, embezzlement, and other regrettable incidents that can happen if nobody is watching.
#3 – It can help you identify irrational spending
With so much money flowing out of the business, employees can often feel as if it is nobody’s money as their pocket is not being directly affected by the decisions that are being made on behalf of the organization.
Irrational spending – such as paying too much for certain goods or services or allocating resources to unnecessary activities – can lead to a faster cash burn and that would force founders to keep raising capital.
Through the use of spend management software, founders can set alerts and notifications that help them in identifying negative spending patterns and irrationally high expenditures to take action before it is too late.
#4 – It can lead to lower negative profit margins
Even though it is normal that a startup loses money until its product goes to market or a working prototype is finished, there is no reason why those losses cannot be controlled adequately.
One of the things that investors tend to look for when scrutinizing the financial performance of a startup is the trend that its profit margins have been following.
Increasingly higher negative profit margins mean that the company will continue to burn capital at a fast pace to keep scaling. This could lead to severe ownership dilution down the road. Meanwhile, steadily decreasing negative profit margins provide a so-called “path to profitability”.
By managing expenditures appropriately, a startup can make itself more appealing to investors by giving them a sense of what it would take for the business to start breaking even or generate profits.
#5 – It can produce savings via credit card rewards
Some payment companies and financial institutions offer rewards to cardholders who use their instruments to make purchases.
This also applies to businesses and spend management platforms have designed user-friendly tools to prioritize the use of the most advantageous payment methods to earn the company some extra money via cash-back rewards, store-specific discounts, and other similar deals.
Bottom line
Spend management is a time-tested practice that helps businesses in improving their profitability. For startups specifically, there are many benefits to incorporating spend management software into their infrastructure as that can lead to a lower cash burn rate.
If you are currently building a business from scratch, consider these benefits and browse the web to find the best spend management software out there. The great news is that some of these platforms are free.
