How to manage indirect spend

Why CFOs and finance pros must monitor their indirect spend
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Amelia Kinsinger

· 3 min read

As we’re all aware, money doesn’t grow on trees. For many CFOs and finance departments, however, indirect spending seems to be as persistent as weeds.

Spending money is essential to a company’s ability to research, create products, or provide services and, ultimately, to grow and enhance its business.

If you’re a finance professional, accountant, or CFO trying to get a handle on your company’s spending, it’s best to first recognize the difference between direct and indirect spending and employ strategies to best determine how to manage it within your company’s specific industry.

What’s the difference between direct and indirect spending?

Direct and indirect spending are two methods used by companies to produce goods or deliver services. 

Direct spending, or direct cost, refers to spending tied directly to the cost of creating a product or service. Indirect spending, or indirect procurement, are costs tied to operating the business, but not specifically to creating a product.

An example of direct spending would be the money a company spends on manufacturing equipment or payroll, while an example of indirect spending would be warehouse space or marketing materials; these items are necessary for the company’s operations but are not explicitly revenue-generating.

Why monitoring indirect spend is important

Gaining control of indirect spending is one of the most effective tools to ensure a company maintains a strong bottom line.

Indirect spending, unlike direct spending, is primarily generated from and managed by internal stakeholders and usually not tracked by spreadsheets and elaborate software systems. This presents a challenge where companies lack awareness of how much indirect spend is occurring on a consistent basis.

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Working to improve full visibility of indirect spending by improving relationships with shareholders, gaining more insight on specific spending categories and crafting a plan for each of these categories are crucial first steps to manage indirect spending.

Strategies to monitor indirect spend

Efforts to reduce corporate spending not only yield large savings, but also can improve products and services produced by the company. This proves to be important for start-up companies where employees often have greater responsibilities and fewer structured policies and procedures around spending.

Companies should begin by increasing their visibility of indirect spend. One of the most effective methods is through spending management or procurement software, which allows them to gather data and analyze spending all in one place. This process strongly encourages buy-in from employees across the company who have to oblige by proper reporting processes to make full-use of the software.

Software allows companies to easily implement policies that reduce indirect spend, such as requiring stakeholders to share quotes from three vendors before making a purchase or ensure that all purchases are reviewed by a procurement team tasked with approving each purchase.

Other steps that companies can take to gain back control of their spending include questioning employee expenditures and submitting requests for quotes regularly to area vendors for services, such as cleaning. Submitting requests for quotation for products or services needed on a recurring basis can provide valuable information, such as pricing trends and whether your needs can be met on an ongoing basis by a specific company.—LR

News built for finance pros

The latest news and insights corporate finance professionals need to know to keep up with their constantly evolving industry.