When quarterly or annual financial results are drastically misaligned with start-of-year predictions, financial leakage probably drives the underperformance. These overlooked expenses can range from inefficient revenue capture processes to supplier overpayments. Over the course of a year, even seemingly minor leaks can have a huge influence on your bottom line.
For controllers and CFOs, identifying and addressing these costs is a crucial responsibility. Learn about some common sources of leakage and how you can plug the gaps to improve cash flow.
Common Sources of Leakage
Corporate entities can lose money through a variety of leakage points, including the following:
Inefficient Procurement Processes
Procurement inefficiencies lead to unnecessary expenses. A few examples include:
- Unmanaged vendor contracts
- Redundant purchases
- Price variances
Companies that lack standardized procurement protocols often overpay for suppliers and services. While it is important to give department heads the autonomy to requisition critical supplies for their respective teams, there also needs to be adequate oversight.
The finance team can help by negotiating long-term contracts with preferred vendors and conducting regular audits to pinpoint sources of overspending.
Excessive Software and Subscription Costs
When was the last time your finance team performed a granular audit of all software and subscription costs? If it has been a while, it’s time to take a look at what digital tools your organization is spending money on. Many companies accumulate unused or redundant software licenses and subscriptions. Overlapping functionalities across different tools further exacerbates the waste.
Periodic software audits offer an easy fix. Additionally, your finance team can make recommendations to the C-suite to help keep technology costs in check. For instance, you may identify a bundling option that allows the company to replace numerous license fees with a single, more affordable solution.
Unoptimized Working Capital Management
Poor cash flow management can lead to excess borrowing and late payment penalties. Inefficiencies in managing accounts payable may cause your business to miss out on early payment discounts as well.
The finance team can help by implementing automated invoicing systems to accelerate receivables. Your team should also address accounts payable issues by taking advantage of dynamic discounting offers and renegotiating payment terms with suppliers to keep cash flow strong.
Employee Expense Mismanagement
Hidden expenses in employee reimbursements and travel costs can lead to financial leakage if left unchecked. Enforce clear expense policies and leverage accounting tools to track expenses in real time. Use routine audits to identify any irregularities.
Operational Inefficiencies and Waste
General inefficiencies and waste can be a huge source of leakage. However, since many of these costs are categorized into different buckets, they may go undetected. Some examples include excessive printing and unnecessary energy consumption.
Excessive printing can reduce the lifespan of costly office equipment and drive up paper expenses. Leaving lights on or heating or cooling the building during non-work hours can also contribute to leakage. A comprehensive audit that explores operational expenses line by line is the best way to find and fix these leaks.
Supplier Overpayments and Invoice Errors
Duplicate invoices and incorrect billing rates can result in overpayments to suppliers. Overpayments represent a missed opportunity for your business to cut costs. Use automated accounts payable systems to flag discrepancies and make sure that every vendor relationship is supporting your company’s financial stability.
How to Plug the Gaps and Optimize Cash Flow
Once you’ve found the leaks, it’s time to plug them. Here are a few strategies for doing that:
Tap Into the Power of Data Analytics
Data analytics platforms allow you to explore financial information using customizable criteria. Use these tools to look for big-picture trends and granular data points that may be impacting your bottom line. With automated analytics tools, your finance team can sift through mountains of data without taking away from their other responsibilities.
Adopt a Spend Optimization Platform
A spend optimization platform can help your business adopt an integrated approach to financial management. With the right solution, your finance team can tighten up payment processes and take advantage of early payment discounts offered by vendors.
Not sure how to find the right optimization solution for your organization? Ask the right questions before choosing a spend optimization platform.
Improve Internal Controls
Internal controls, or a lack thereof, can exacerbate leakage. For instance, allowing department heads to make large purchases without review can lead to overspending. Evaluate your current controls and clamp down where necessary to keep costs in check.
Where to Begin Your Optimization Journey
Start by taking an accounting of your organization’s current cash flow and revenue capture processes. Identify the areas that would benefit most from these strategies (e.g., procurement) and implement the appropriate solution to address the issue. As you build momentum, make additional strategic improvements to increase the financial stability of your organization.
