Managing Tail-End Spend Efficiently

The Pareto Principle applies to business expenditure as much as it does to many other aspects of a company. With a well-managed procurement process, strategic spending will account for 80% of a business’s total expenditure. The other 20% is where it becomes problematic because the purchases are:

·         Erratic

·         Of low value

·         Bought by people outside the procurement area without buying knowledge

What we mean by buying knowledge is that not all members of a workforce know about service level agreements, are concerned with contractual obligations, or know the specifics of buying on a commercial capacity.

That last part of staff is a critical aspect to address when you’re looking for a tail-end spend solution to bring your complete procurement process up to 100% managed level, rather than 80% managed well and 20% running amok.

4 Steps to Retake control of your expenditure

1)      Identify the low value purchases

This is one that’s pretty easy to do yet it remains undone in many a business. It can be done with just an Excel spreadsheet, but you’ll likely find whatever accounting solutions you have in place will also be capable of sorting your expenses by value.

Take a list of your expenses and arrange them from high to low. At the top will be your most used supplier. You’re likely to find that the Pareto Principle of 80/20 can be applied to your expenses. If you work with five suppliers, the bulk of your purchases will be with around four suppliers. Yet you’re likely to have many more suppliers invoicing - and often regular.

The reason being that at the bottom of your list will be numerous spontaneous purchases, occurring with multiple suppliers and be of such a low value amount that the accounts department has paid the invoices and never really investigated it.

When you delve into your smaller purchases, you can find that the total amount of them is substantial. Substantial enough for you to want to invest in making changes to minimise the leakage this problem’s causing.

Identify where the leak is by finding out the suppliers and categorising purchases.

2)      Get staff buy-in

Whatever solution you implement, staff must be on-board. Give them the information they need to know about how buying will work. Whatever they need to buy-in, have procedures in place for them to follow.

Hint: A list of preferred suppliers or one preferred supplier per category will greatly increase the volume spend and minimise incoming invoices.

3)      Implement categorical purchasing

With the buy-in of all your staff, it’s helpful to let them know about the buying process applied to procurement for strategic sourcing; the hierarchy of the chief category, main category, and the sub-category.

When staff can do this that have the authority to make buying decisions, they can then allocate a category to their purchase and divert more to the same supplier, reducing the amount of fragmented purchases. This happens much more than you think when you take into account the amount of people with buying power for low-value purchases across multiple departments requiring the same stock.

4)      Have credit agreements with preferred suppliers

Instead of being invoiced per order, have your preferred suppliers invoice periodically, such as monthly or fortnightly for high value accounts.

The reason you want to have a credit account is because you’ll have less invoices and it’ll make it plain-to-see to suppliers how much your regular spend is. This is helpful when you go into negotiations as it gives you buyer power, helping your business case for a discounted transactional unit cost.

In Conclusion

Strategic buying is difficult to roll out for every single purchase a business will make. There’s far too much involved. Things like stationery that doesn’t require office personnel to have to run through the accounts department for approval prior to purchase.  There are a lot of those purchases adding up and approval isn’t the solution. That’d slow the process down, making it detrimental to operations.

A successful buying program will have staff on-board with a policy and procedures in place so that everyone knows your policy on what can be spent and how they should go about buying what they need and will be in the best interest of the business.

Strategic buying can account for 80% of your total expenditure but if you leave it at that, you’re leaving money on the table. Combine category purchases to increase your buyer power and minimise the administrative burden that out-of-control tail-end spend brings. 

Beware Of The Air Conditioning Systems Con

The increasing use of IT equipment, the employees to operate them and the office spaces to house them has led to a surge in demand for energy efficient air conditioning installations.

Office complexes and retail outlets account for the vast majority of installations and for good reason too. Businesses need their staff to be comfortable for maximum productivity. In retail stores and outlets, temperatures are controlled for staff and customers’ benefit. The cost of maintaining optimum temperatures… well, that can get out of control and fast.

Do you know much about your air conditioning units?

Not many do. The bill comes in and it’s accounted for as energy, alongside the heating, and other utility bills. Most go about their business completely oblivious to the amount of money being thrown at energy suppliers that could be kept in the business bank account, just by having an economical air conditioning system running.

Given the climate of the UK, there’s really no need for all that much of a sophisticated system. We have cool temperatures most of the year, which allows for HVAC systems to make use of “free cooling coils”. With these, the air is drawn from outside, and then circulated to cool the indoors. The systems that waste energy don’t pull air from outdoors, but instead draw the heated air from indoors, only to cool it with a “fan” coil unit, thus wasting electricity.

There’s no point having your heating running to heat the air up, only to have your air conditioning system kick in to cool it back down again. That’s what causes energy bills to double. Yes, operating an air conditioning system can see your energy bill rise by 100%. Often is the case, it’s because of heating and air con competing to maintain temperatures.

It’s not always the system that’s at fault as it can be the installation. Energy efficiency with heating, ventilation, and air conditioning (HVAC) systems is best done with a dead band. That means that the heating and the air conditioning co-operate on the same network with a temperature differential between them for when they’re programmed to start and stop. They’re programmed to operate automatically to maintain a consistent temperature. They do need to work together, on the same network to prevent two systems competing, one heating, and the other cooling at the same time.

As a rule, air conditioning systems should not be operating in temperatures under 24^o C. Where the dead band comes in is when the heating is set to maintain that same temperature or very close to it. The Energy Saving Trust recommends a temperature gap (dead band) of 4 ^OC. This will prevent the two systems operating simultaneously.

For that reason, every air conditioning system must have variable operating temperature controls, otherwise, it would need manual oversight to operate, which would never be efficient for any business.

The Importance of System Zoning

Premises operating super old air conditioning systems are likely to lack this feature. System zoning is the most precise way to control temperatures indoors. And it’s pretty simple too.

The construction of air conditioning systems uses dampers. They open to allow air in to circulate it, and close when the room is warm enough.  It doesn’t matter whether it’s using free coil or fan coils to cool the air, when the temperature heats above the pre-set level, the dampers open and the system kicks in to reduce the temperature.

With zone controls, there’s multiple thermostats installed throughout the building, which are all connected to the systems control panel, operating the dampers. The thermostats monitor the temperature of different zones, allowing one area that’s heated to be cooled down, but not in other areas of the building where it’s not needed. For example, in the canteen, where everyone is congregating for lunch, hot cuppas, microwave dinners etc. 

For that reason, cost-efficient air conditioning systems will have system zoning unless you’re installing it in a factory or warehouse where zoning is going to make little difference.

That said though…

The Added Incentive

The government is adding incentive's to businesses to have co-efficient air conditioning units installed through the use of your “Enhanced Capital Allowance”.

Here’s the thing though…

You can’t just take the word of any supplier, or independent contractor who comes along to offer you a system with claims of 20% reduced energy consumption. There are fraudulent claims being made on some systems, and the simplest way to avoid them is to check the official “Energy Technology List” (ETL) which lists all the tested and proven energy efficient systems. You can even search on there to find systems, manufacturers, and if you get a quote on a system you’re interested in having installed, you can verify the model number is listed to back up the claims being made.

If a product isn’t on that list, the ECA claim is void. Air conditioning systems that are proven to reduce your energy costs will be listed. If it’s not listed, it’s likely it’s not as efficient as the manufacturers marketing materials are claiming.

Now, discussions for these purchases can be long, so before ordering any, be sure to re-check the Energy Technology List to ensure it is still listed as it does get updated periodically.

For those looking for a cost-efficient air conditioning system, by using the ECA, the entire cost of the installation can be written off through the allowance in the year of purchase. That can provide a positive boost to cash flow right away, and then cost savings throughout the life of the system. 

Facts That Finance Officers Ought To Know About Outsourcing Procurement

The outsourcing of procurement can be viewed by some in finance as handing over some or all of the control over the buying processes. The opposite couldn’t be further from the truth.

The truth is that outsourcing any of your procurement functions isn’t about passing over control. It’s about bringing aboard advisors, sometimes specialist advisors whose aim is to save in the short term and the long term simultaneously.

There’s many a way a procurement specialist could advise and bring expenditure down to increase net profits, but there’s also more benefits to be realised than the initial cost savings.

5 Ways Procurement Expertise Enhance Business Functions

1)      It adds a broader skill set to your organisation

When you outsource any or all of your procurement, you aren’t necessarily outsourcing every aspect of your procurement. If you have the resources internally, outsourcing adds more expertise to your existing department and also gives your staff access to other in-field experts. That can also lead to business efficiencies being enhanced, which is the sole purpose of procurement. Outsourcing can add to that, rather than replace it.

2)      Bottom-Line is Improved

All your expenditure throughout your organisation is net profit. If left unmanaged or even poorly managed, stakeholders will suffer. The objective of smarter procurement exercises is to reduce the overall cost of purchasing.

3)      Improved Risk Management

When done properly, after thoroughly investigating your options, you should be partnered with a professional organisation with a thorough understanding of commercial trading agreements, litigation matters and contractual expertise. They aren’t lawyers by right but they should possess a great deal of knowledge surrounding commercial contract laws, which will be able to serve you well on a professional services advisory capacity, which you may already be outsourcing anyway.

4)      Add appeal to your business

Clients are known to take businesses more seriously when they have a Corporate Responsibility Policy. They make it known that they are careful where they spend, making their businesses attractive to clients and investors alike. There’s a lot to be said for how you operate your business, and structure your processes to show you are operating ethically across your supply chain. That’s difficult to do without procurement expertise to assist.

5)      Frameworks can lay the foundations to your policies

Operating without a procurement framework isn’t a good idea. With one, everyone knows your policies, where they stand and the processes/channels to go through when buying anything of substance.

You don’t have to specifically bring aboard a procurement officer to implement a procurement framework, as you could approach it through outsourcing to harness the existing frameworks already used by established firms specialising in procurement.

In conclusion

Outsourcing some or all of your procurement functions isn’t just about realising cost reductions. That it will do, but it also brings about some expertise that many businesses don’t have access to and the ones that do, the additional expertise adds to it.

All of the processes work to enhance your businesses reputation, while minimising risk to your business through effective contract management and where possible, change management too, but at the heart of the process is always cost reductions. Sometimes that’s in the short-term, other times it’s the long game that’s played with a lot of strategy for huge savings across the board.

In some cases, when businesses are struggling financially, it’s a revision of the procurement functions that could essentially turn the entire businesses finances around by realising savings already missed through poor contract management or even a lack of market knowledge.

It pays to collaborate. 

England And Wales Rates Revaluation Analysis

It’s the review that’s supposed to happen every five years, but this time around, it’s took seven years as it was postponed until 2017.

The time has arrived for the Valuation Office Agency (VOA) to reassess the 1.96 million non-domestic premises around England and Wales to produce the latest draft Rating List, determining the business liabilities of every business across England and Wales.

…For the next five years!

For those who have only been in business since after 2008, your business rates are based on the 2010 valuation by the VOA. They review the Ratings list of all non-domestic premises every five years.

The business rates you pay are based on:

·         Your industry

·         The cost of plant machinery and necessary operational equipment

·         Your property price

·         Lease cost

Problem is…

The current business liabilities are based on post-recession property rates that have fluctuated massively between 2008 and 2015. The rates are valued two years predated; therefore the rates coming into effect on 1^st April 2017 will be based on the valuations from 2015.

Confused?

Here’s what happens….

The business rates payable are based on the properties Rateable Value two years prior to the Rates Revaluation that the VOA is supposed to conduct every five years.  

This time around, it’s far more significant than usual because this Rates Revaluation has taken seven years and come post-recession and post-Brexit. Businesses are looking for clarity while the government is looking for money.

Businesses Fund Communities

The rates paid through business liabilities are split 50/50. 50% go to central government, the other 50% to the Billing Authority (local council) which it retains for funding community projects.

The system has been described as being broken because it results in rich areas keeping more money, with the poorer getting worse because of a lack of investment. Many areas have witnessed the effects of this scheme when high street stores collapsed, causing a ripple effect across communities when local authorities faced financial strain and severe budget cuts.

The other 50% of revenue though is pooled by the Central Government and then used to fund poorer communities through Government Grant Schemes. In former Chancellor’s George Osborne’s last budget announcement, when he described the “biggest transfer of power to our local government in living memory", he was talking about changing the 50% split to allow for local authorities to retain all revenue collected. That would result in even more mayhem to an already chaotic system, so how the funds are to be split are still in discussion, but what’s not is that there are…

Huge Changes Ahead (and not many signposts)

Every business in England and Wales is going to be affected. It’s estimated that the majority of smaller businesses will see a slight fall in their liabilities, but on the other hand, there will be a 9% increase to the business rates on a national scale.

How does that work?

London Foots the Bill!

That’s right…

The vast majority of communities are going to see slight falls to business rates; however, because London has significantly higher rental charges due to higher property prices, the operational costs for retailers are going to be substantial, as high as a 415% of an increase for stores operating on Dover Street, Central London. 

The vast majority of stores in that area are multi-channel retailers and also regional with some operating globally. The increases will put financial strain on profit margins, and given some are chains, it will in all likelihood take a ripple effect. Retailers will need to protect their margins, which could see the less cost-efficient stores in other local areas either close or relocate.

The retail sector has changed substantially over the past seven years. The postponement wasn’t welcomed in 2010, and the repercussions to the business community certainly won’t be welcomed this time around.

British Telecom has already announced they will be challenging the Rates Revaluation by the VOA, as the firm will be hit with a 350% business liability increase, up from £165M per year to £743M from April of next year. An increase that BT says has forced them into threatening to increase consumer broadband prices around the London area and cut investment in telecoms technology.

Available Relief for SMBs

·         Business properties with a Rateable Value of £12,000+ have to pay the rates. Under that Rateable Value, the rates won’t apply.

·         Tapered relief will be available for properties valued between £12,000 and £15,000 so smaller sized firms will be able to get some relief from the rates.

·         Between 50% and 100% relief is available to local business owners operating in a local community with a population of <3,000.

·         Up to 80% relief is available to charities and sports clubs

·         Businesses operating within Enterprise Zones, are empty or newly occupied can apply for relief, although that’s not to say the application will be approved. It will only be considered.

The only exception to the Business Rates is religious properties, and agricultural land.

Priorities Now!

The priority for every business owner between now and April of 2017 should be on risk assessment because there is a huge risk of financial interruption when the new rates come into effect on April 1^st 2017.

As there are going to be winners and substantial losers, with the cost of doing business based on the new rates remaining in place for the next five years, there will be a transitional period for businesses to benefit from staged rate increases. It’s not going to make it any less of a financial burden because the bill will still need paid, but there will be assistance available for those with higher than anticipated increases to their business rates.

As all business owners will be affected either positively or negatively, it’d be beneficial to open discussions between tenants and landlords to begin negotiations of property lease prices in light of the business liability rate changes due to come into effect in the next six months.