Going Rogue: Tightening up on Unauthorized Spending

  • Sep 9, 2018,
  • By Jeff Kennedy
rogue-spend

Wouldn’t it be great if every dollar spent in your business produced bigger and better results? Imagine every dollar actually being a worthwhile investment. Growth would continue, processes would improve, and both workers and the company would prosper. But that isn’t reality. In most businesses, there is waste. Sometimes this waste is unavoidable. Sometimes decisions that seemed well thought out and prudent don’t look so good in hindsight. Unfortunately, that’s just part of having a business. All you can do is make the best decisions possible with the information you have at the time. That’s just the way of the business world.

But what about other spend that’s not having a positive effect? What about spend that is either unauthorized or simply a bad idea from the start? The sad fact is that there is wasteful spending in most every business that never was part of the plan. Goods and services are purchased without good reason. Expenses are approved that have absolutely nothing to do with the business at all. This wasteful rogue spend can cripple a business and negatively impact your chances at real, sustainable growth.

Sources of Rogue Spending

Reining in this rogue spend can be a challenge. If your company has more than a handful of employees, then oversight in the approvals process can be an unwieldy task. The good news is that every unauthorized or ill-advised spend request that you can get under control can drive immediate benefits for the business. In other words, your victory in curbing rogue spend doesn’t have to be absolute; even the smallest improvements can make a big difference.

To start addressing this pressing issue we suggest first understanding the different ways that spend gets out of control. Here are the types of unauthorized or ill-advised expenses that we see most often:

Non-specific, but allocated budget expenses:

All too often managers and purchasers feel the need to spend all of their allocated budgets. Sometimes the thinking is that if the budget isn’t used in a specified fiscal period then it won’t be available in the next fiscal period (a.k.a. “Use it or lose it”). This is backwards thinking but, unfortunately, it exists in many businesses around the world. This type of spending behavior is not always the fault of the purchaser but rather a failure in leadership to communicate that future budgets aren’t necessarily based on historical spend.

Suggested solution:
Make a cultural adjustment. Create incentives for purchasers to reduce spend where possible. Some companies go as far as to compensate purchasers with a portion of the savings; however, if not carefully managed, this can drive negative results. Most important for any organization, is to create a culture where buyers don’t feel like the dollars needed to do their jobs well will be lost at a later date in the event they choose not to spend those dollars now.

The need to “do something”:

When a department or team is struggling to produce results, a common internal reaction can be for it to try and spend its way to success. Buying a new tool, hiring a new contractor or employee, investing in inventory that hasn’t been properly evaluated in the market, etc… These reactionary expenditures are well-intended, but often woefully misguided and can result in substantial financial leaks for businesses.

Suggested solution: Implement a gate keeper. Gate Keepers can take many forms, from stakeholders to process steps, and their effectiveness is often directly impacted by the company’s culture and goals. Some companies implement a process that requires a cross-functional stakeholder to sign-off on unplanned spend. Others may require unplanned expenses to go thru a waiting period, sometimes as long as 30 days, before purchase. If nothing else, the requirement for a business-case to be presented for any new expense over a certain dollar threshold can be very effective. The role of the gate keeper is to ask the requester or purchasing agent, “Are we buying this because we need it, or can we simply not think of anything better to do?”

A misunderstanding of priorities:

This one can be hard to stomach because most often such expenses are a failure of management, not the purchaser. Sometimes expenses are made because the employee or procurement team member doesn’t understand the company’s vision, priorities and spending strategy. For example, perhaps a shipment of older hardware is purchased even though management has decided on the newer version. Maybe more employees are added even though a hiring freeze has been implemented. Or maybe managers are just juggling too many things and don’t understand priorities themselves.

Suggested solution: Communicate budgets (where appropriate). Frequent and candid communication with teams and managers should include decisions that affect spending and budgets. While not every financial decision, and its expected impact, is for everyone’s consumption, it’s crucial that your management understand how their teams take direction when it comes to spending and adjust accordingly.

Non-business expenses:

You’d like to think that your employees are all honest, but, whether intentional or by mistake, every company has reimbursed items on expense reports that have no business being there. Maybe a food submission that didn’t really include a client. Maybe a flight ticket or hotel expense that was already paid for by the company. Add to this that most managers don’t normally interact with the systems needed for a detailed review and tend rely on batching and e-mail approval. The risk is high.

Suggested solution: Enable a detailed review. For managers to be diligent in their review, the business process needs to be agile and enable the manager. The process must engage managers on a platform they’re familiar with and reduce the amount of extraneous data they see. When implemented correctly, managers will act sooner, and with fewer reports in their queue at any given time managers can be more detail-oriented in their reviews.

Curbing Unauthorized Spending Once and For All

When you think about it, unauthorized spend takes a variety of forms. From well-intended employees to sloppy approvers, there are likely a number of leaks in the bow of your corporate ship. The good news is that you can shore things up in the future with attention to detail, enhanced communication, and simplified spend processes for everyone. Tools like Capriza ApproveSimple work in tandem with your current systems to make approvals easier for everyone. And when that happens, unauthorized or ill-advised purchases are much less likely to slip through the cracks.

The health of a business is never just about the revenue generated through new sales. It also matters a great deal what you do with that revenue and how you manage spend. If you’d like to better understand how to reduce unauthorized spend and streamline your approval processes, we would love to chat. Contact us here to schedule a demo of ApproveSimple and finally start reining in unauthorized spend.

Jeff Kennedy

Jeff Kennedy is an active CPA responsible for Capriza’s global finance and accounting operations. Prior to joining Capriza, Jeff held various positions including Corporate Controller at Bitcasa, Inc. (private IP exit) and Accounting Manager at Zynga, Inc.

lisa

See How Easy it is to Consolidate Approvals

Test Drive ApproveSimple!