Perhaps the most important element in accounting is the bottom line or profits of a company. This is the way most stakeholders will evaluate the health and outlook of a business. It only makes sense that companies are constantly looking for ways to improve their bottom line. But what’s better than finding a solution that boosts your bottom line? Finding a solution that improves BOTH your top and bottom line! Sounds too good to be true? Well, read on to find out how state-of-the-art accounts payable invoice automation (APIA) solutions can not only help you increase revenue but can also help your AP team identify opportunities to save you money.
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In order to understand how APIA can impact your bottom and top lines, it’s important to understand two foundational concepts: direct spend and indirect spend. Then we will discuss how the management of direct and indirect spending can affect your company's bottom and top lines in different ways.
What is Direct Spend?
Direct spend is defined as the raw materials and goods used by a company to create its own product or service. Direct spend, also known as direct procurement, is part of the cost of goods sold (COGS).
For example, a company that sells baked goods needs to buy flour, sugar, eggs, butter, and other ingredients along with the packaging in which the goods will be sold. Without those elements, that company cannot sell its baked goods. Those materials are directly responsible for the company’s revenue.
Likewise, if you are the company that makes the eggs, butter, or packaging, any costs that are directly tied to your future sales of those products are considered direct spending.
What is Indirect Spend?
Indirect spend, or indirect procurement, refers simply to money that doesn’t have a direct link to revenue. The baked goods company, for example, may have indirect spending on travel to meetings about the baked goods, computers for their employees, and rent for their corporate headquarters. Obviously, the business could not function without these costs, but they are not revenue-producing as they aren’t necessary for the manufacturing of baked goods. On the company’s income statement, these would typically be classified as operating expenses.
Managing Indirect and Direct Spend in Procurement
Many companies struggle to manage indirect spending, which can deeply impact their profit margins. Indirect spend can be distributed among multiple locations, business units, and categories, which makes it hard for the procurement team to track. Since it is so widely distributed, finding savings opportunities across all locations, units, and categories can be difficult. Those in charge of indirect spend management or procurement have to rely on expensive technology and manpower to capture savings where they can find it. But they also don’t usually have the tools to monitor indirect spending to find these savings opportunities to positively impact the bottom line of the company.
Effective management of direct spending, on the other hand, has an immediate impact on both the top and bottom line of a company. Successful management of direct spending can build supply chain resilience and agility. When the procurement team develops close relationships with its suppliers, they can often create direct spend savings within the supply chain. By examining spend analytics of purchase orders, the team can identify trends and areas where improvements can be implemented to better leverage buying power.
For companies with a lot of direct spending, which involves invoices with purchase orders, APIA solutions offer fast, meaningful savings. Proprietary features like DataServ’s Autovouch provide an automatic, touchless 3-way match between invoice, receipt, and PO. That means without human intervention, your company can quickly pay your vendors, taking advantage of payment term discounts. You are also more likely to prevent late fees from being charged or damaging your vendor relationships. APIA also allows your team to get real-time financial information anywhere, on a desktop or mobile device, with analytics capabilities that can increase efficiency, identify pain points, and let you see the big financial picture.
If you are ready to invest in an APIA solution to help your team effectively manage direct spending, contact us.