How To Save Millions Simply By Reducing The Cost Of Spending
Despite widespread agreement that effective expense management
is critical to business success, there's still one aspect of
expense management that tends to be handled badly. And it's
costing many businesses millions each year! Ironically, it's a
cost that can be drastically reduced (all but eliminated)
overnight.
I'm talking about the processing costs associated with
purchases. They're called "transactional processing costs";
they're not the cost of the purchase itself, but the cost of the
transaction.
The Dollar-Value of Transactional Processing Costs
The end-to-end cost of processing high volume, low value
purchases (such as travel, entertainment, contract labor hire,
training, employee claims, stationery, publications, books,
kitchen supplies, etc.) can be exorbitant. In fact, in many
cases, it's higher than the purchase cost itself (even with the
efficiencies delivered by an ERP application). The reason for
this is that the total cost-to-transact includes many associated
activities such as processing, administration, and bank fees, to
name just three. In a typical business, 90% of purchases are low
value; they represent less than 10% of total company purchase
spend. But because the cost of each transaction is normally much
the same regardless of the purchase price, in reality, these low
value purchases cost far more than the big purchases.
Consequently, the majority of available company resources (e.g.
employee time, effort, and money) may be dedicated to managing
the low-value, high-volume transactions that constitute a
relatively small percentage of overall company expenditure.
How to Reduce Transactional Processing Costs
An increasing number of businesses have taken steps to address
this issue, and have enjoyed substantial operational savings and
direct bottom-line improvements. They've significantly improved
their operational efficiency and, in many cases, reduced their
transactional processing costs by more than 90% per transaction.
This represents substantial cost savings when considering the
volume of transactions most companies process each year.
So how did they do it? What is the opportunity for those
companies that still employ traditional methods?
Today, many businesses have found a straightforward, effective
and efficient answer to this question. They employ a simple
solution that combines the use of a traditional credit card with
expense management software.
How does this work in practice?
The Process: Your employees use a corporate credit card to
procure goods and services. The electronic transaction is sent
to their individual PDA or PC (via any network or internet
connection). The employee confirms the transaction and charge
with the click of a button, and a fully coded transaction is
then posted to your chart of accounts. You then make a single
payment to the credit card provider for all purchases made using
the card during the month. Everything is managed automatically
in real time, including all of the controls, business rules, and
management notifications that ensure purchases are approved and
comply with corporate policy.
The Result: You're able to consolidate thousands of payments
into a single transaction. With the supporting systems, you can
analyze expenses and implement controls on a real-time basis.
Case Study
A company processes around 50,000 payment transactions per year,
of which 80% (40,000) are low-value/high-volume non strategic
expenses. By implementing a ProMaster expense management system,
they are able to save $56 per transaction, delivering a total
cost saving of $2.24m per year (40,000 x $56.00 = $2.24m).
Admittedly, this includes both 'hard' and 'soft' savings, but
the business case is real, and is proven to deliver results in
all industry sectors including R0I within six months.
Conclusion
For years now, companies have been using credit cards as a
corporate payment tool for travel and entertainment costs. The
extension of the concept into general business procurement has
been made possible more recently by the release of new products
from card issuers and the development of sophisticated expense
management software systems that provide immediacy of control.
Today the concept is a key addition to corporate improvement
project portfolios, covering all non-strategic low value spends
and potentially far more.