Why Software CFOs Need Spend Control
The pandemic brought about many changes to business. Learn why priorities like spend control reflect what finance and accounting leaders are focusing on right now and why.
At any given time, there are countless buzzwords floating around the tech industry. Reflective of the current environment, these trendy terms offer valuable insight into strategic areas of focus for businesses. In the face of the economic uncertainty brought on by COVID-19, the buzzwords are shifting and bringing with them new areas of focus with businesses looking to accounting and finance for leadership. Words like risk management, automation, workflow processes, and cloud-first are just a few examples of shifting priorities. Touching all of these areas is another important trend: spend management.
But what is spend management? More importantly, why should it be a key area of focus for software companies during a recession?
Spend management is a comprehensive framework for managing all variable company spend, including employee expenses, and discretionary costs. By looking at the whole picture, a business can make strategic decisions that position it not only to survive a downturn, but to thrive. Here are five reasons finance and accounting leaders at software companies should be well versed in spend management during this time.
1. Spend control should be top of mind
Leaders look to CFOs to not only ensure the books are closed properly, but for expertise in improving business operations to meet strategic goals and weather uncertainty. During an economic downturn, it’s natural for all businesses, including software companies, to tighten their belts and look for ways to control spending.
Historically, software companies can usually scale quickly. But any type of recession can easily put an end to fast growth.
This is where spend management helps. Nobody can truly understand the impact of a recession on its bottom line and profits. Even high margin industries such as software need to be cognizant of spend. Implementing a comprehensive spend management system, developing an appropriate spend policy, and assessing spend culture helps companies control costs and position them to thrive through uncertainty.
It’s important to note that implementing a successful spend management system requires a shift in focus from the more traditional approach of expense management. It’s important to recognize that expense management is strategic only as a component of the broader framework of spend management. That is, while expense management is designed to process, pay and audit employee expenses, spend management encompasses everything an organization spends from software subscriptions, advertising spend and employee expenses to stay in business and keep that profit high.
2. Analyze spending leads to better business decisions
Perhaps the biggest challenge the pandemic has brought with it is uncertainty, which in turn has compromised everybody’s ability to confidently make decisions. Even though software companies sell the majority of their products through subscription revenue models, no industry can be completely resilient to economic downturns.
Although software companies have dominantly focused on revenue building, customer churn, revenue churn and customer lifetime value (CLV) it’s unclear how long the downturn will last so it’s time to start to build a stronger foundation for making sound business decisions through spend metrics and insights.
Translating the raw data of what is being spent and where, into actionable intelligence drives better business decisions. Analyzing spend generates valuable insights that help software companies:
- Budget for best and worst case scenarios
- Streamline its procurement strategy for challenging times
- Identify spend that can be deferred
These are just a few of the ways spend analysis can benefit decision making, but with visibility into spend, data can be sliced and diced based on a wide range of KPIs, including:
- Customer Acquisition Cost (CAC): Sales and Marketing spend impacts how much it costs to acquire new customers. When times are tough, CAC will likely go up. By improving tracking and management around sales and marketing spend, software companies can ensure this cost stays as low as possible.
- CAC to LTV Ratio: This ratio is important to most software companies. It measures the lifetime value of customers and the total amount of spend required to acquire them. By gaining better control of the total of marketing and sales spend, companies can ensure this ratio doesn’t drop to dangerously low levels.
3. Don’t overlook discretionary spending
When it comes to discretionary spending, it’s easy for organizations to get caught up in reducing expenses related to travel or meals and entertainment and consider its job done. The reality at the moment is that these expenses are naturally being reduced during the lockdown.
For most businesses, there are other aspects of discretionary spend that are easy to miss. Recurring IT subscriptions that are no longer valuable is one such example. With a complete picture of spend, it’s easier to identify costs that aren’t essential to business operations. You can then analyze how much of this spend is making the company more efficient and actually bringing in new customers.
Ultimately, a company’s individual spend culture will dictate how it values different areas of discretionary spend, so there isn’t a one-size-fits-all solution to reducing this. However, a holistic spend management approach helps identify savings. It also means you can reinvest these savings into initiatives to boost the customer base and grow revenue.
4. Spend management is crucial for distributed teams and remote work
At the best of times, different parts of an organization work in silos.
With the majority of software companies now working remotely, this situation has only been exacerbated and finance and accounting teams are searching for the best tools to boost productivity while working from home. This is especially true for teams that relied on manual or verbal processes for approving purchasing and expenses. In a distributed work world, these informal processes create frustrating bottlenecks that compromise efficiency.
If you require new software to help sales and marketing boost their lead generation, how is this tracked? With everybody at home and working alone, you can save hours keeping things in one place.
5. Spend management improves risk management and internal controls
Are your internal controls working as expected?
Is every member of the organization complying with your spend policy?
Do you even have a spend policy?
These are important questions for finance and accounting leaders to ask, and the answers can be found by analyzing all aspects of company spend with a platform to round out the basic financial tech stack. This type of analysis improves internal controls and spend policy. It also enables effective risk management. For example, identifying unapproved purchases or overspend in certain departments helps you stay on top of cash outflows. It also ensures you have a confident view into runway at any time.
Spend management: the bottom line
As companies continue controlling costs in a crisis and work through the fallout from the global pandemic, it will become clear that spend management is more than just a fad but a valuable framework to help software companies analyze spend, manage risk, and make sound business decisions.
With the help of a robust spend management solution, software CFOs can gain valuable insight into spending across the organization to help them gain visibility into the changing levers behind CAC and other important KPIs and make sound decisions based on spend data.
With the help of a spend management framework and software, companies can use this time to their advantage. They can improve purchasing workflows, identify cost savings, and improve cash allocation. This way, resources can be re-invested into customer growth programs. And with strong leadership, these activities can prepare an organization to push through unusual times and position itself to succeed.
Intrigued? Want to learn more about spend management? Check out our whitepaper Spend Management for Fast Growth Companies.
A version of this article originally appeared on AccountingWEB.