Failing to analyse how an organisation
utilises its finances will increase its costs and prices by 7 – 9%
(£2.1M—£2.7M) than the open market within a £30M annual budget. Over a typical
average Framework Agreement of four years, this will equate to increased costs
of £9.3M—£11.2M on a total budget of £120M.
Within the public sector, organisations
are limited in how much they can increase their revenue. The UK social housing
sector is governed by the Government's Social Housing policy and policy
statement on Rents for Social Housing.
Spend analysis is essential to
understand how an organisation utilises its financial resources before taking
the necessary steps to ensure they are spent effectively. Purchasing more by
spending less is crucial to maximising the efficiency and effectiveness of an
organisation’s financial resources.
A Category Spend report is more detailed
than a traditional financial budget, which may contain information on up to 60
areas of spend. A Category Spend report may include details of up to 500 spend
areas to provide a more detailed and profound understanding upon which budget
managers can base their tender or negotiation decisions.
The imposition of spend categories
allows spending patterns to be discerned at their lowest, most basic level,
ensuring that the spend category can be managed more effectively and that
quality and supplier management are simplified and more controllable.
Ensuring that financial resource use
efficiency is maximised can be broken down into several crucial steps. It is
essential to take a logical approach to develop a commercial plan to reduce
costs. The ideal place to start is a list of Supplier Invoices for the last 24
months to ensure that all regular and irregular spending is captured within the
analysis.
The next stage is to assign spend
categories to each area of Supplier spending. The assignment must accurately
depict what the spending is used for. However, where a Supplier's spending is
used for purchasing assorted products and services, the Spend Category must be
assigned to the highest financial value of the products and services purchased.
It is essential to prioritise the
tendering or negotiation of spend categories based on the potential benefit of
the outcome, but equally important is to ensure that the risks of Health and
Safety and legislative compliance are also considered.
However, this requires organisations to
become proactive in reviewing and coordinating their tendering and negotiating
activities and engaging with stakeholders to undertake the appropriate
negotiations based on accurate spend data. This provides the spend category
reporting for budget managers to prioritise their tendering and negotiating
activities.
Additional articles can be found
at Commercial
Management Made Easy. This site looks at commercial management
issues to assist organisations and people in increasing the quality,
efficiency, and effectiveness of their products and services to the customers'
delight. ©️ Commercial Management Made Easy. All rights reserved.