In our article “Six Ways Your Company Might Be Overspending,” we introduced our seven-part series on identifying and ending overspending. In this article of the series, we go over the first of the six ways: Ignoring spend limits.
How this overspend begins
On the surface, it might seem obvious — your company is overspending by overspending.
But there’s more to it than just that. Your company has taken the time and effort — and even money — to work out a budget and create spend limits for purchases. That was for good reason. Those parameters were set to build a financial breakwall, controls specifically meant to keep overspending at bay.
But now, those spend limits are being breached — and to prevent the overspend, you need to get to the bottom of what’s happening.
What this overspend looks like
Typically with spend limit breaches, it’s not about the products that are being purchased, but instead about the money being spent on those products. In other words — it’s about price and costs.
As a simple example, say your department needs office supplies. The folks in Accounts Payable aren’t going to fight you over your need for pens. But, they might have a problem if you decide to purchase the priciest gel pens on the market over the less expensive ballpoints. Equally, buying 50 boxed units of pens rather than only 10 might also be a cause for concern.
And if these purchases are flying in the face of already established policy goals and procedures, that’s a problem.
Why this overspend happens
There are quite a few reasons why this overspend might be happening.
One might be that your spend limit policies aren’t clearly stated. Even though they are included in your policy and procedures document, if your spend limit policies are vague to begin with, there could be misunderstandings on the part of your cardholders, with actions that correspond.
Similarly, while they might be stated well, the policies might not be adequately communicated. So, in that case, while the policies are clear and sound, your cardholders are ignorant of their existence.
Another reason for going over spend limits could stem from an inventory stocking issue. An item might be on sale for only a limited time, and a cardholder might be tempted to go beyond spend limits now for the sake of saving money in the long run.
Or, they might do so out of worry that an item won’t be available at a later date — a problem also for shippers, as mentioned by Logistics Management in their article “Managing the complexities of inventory“. A sense of urgency or scarcity can lead cardholders to think that it is best to buy more now —and go over spend limits — rather than be without later.
There are also maverick spenders — people who do whatever they want, when they want, regardless of your set policy. You can learn more about that by reading our article “Spending Money Without Approval — the Maverick Spender.”
Yet another problem arises when your spend limits are only within your policy. In other words, your company failed to place hard stops on your P-Card, Travel Card, or other expense accounts. When your policy is reflected with hard spend limits on card accounts — limits that won’t allow the card to work — it’s much more enforceable.
But even hard spend limits on accounts aren’t foolproof. A way some cardholders get around that roadblock is to use multiple cards and/or accounts, so that on the surface it appears that they’ve stayed within their spending limited. But they haven’t. The overspend is simply spread across multiple accounts.
Worst of all is when your company has neglected to define spend limits altogether. As such, they become just a vague idea or suggestion, with an underlying belief that cardholders “know better” and “will do the right thing.” Operating under such assumptions means that spend limits now are open to constant, inconsistent, and conflicting interpretation by your employees.
How to end this type of overspending
Here are our suggestions on how to help your cardholders adhere to your spending limits.
Create a clear, well-communicated policy.
The first step is to define your spend limits. Then next is to state them as clear as crystal within a written policy.
There should be no ambiguity or confusion surrounding your spend limits. The numbers should be hard. The system should be precise and deliberate. The information should be in writing and always accessible to your employees.
Once you have created or updated your spend limit policies and are ready to communicate them to your employees, Card Integrity can lend a hand. We have the experience and background to ensure that your written policies are correct, understandable, and easy to follow. We can then help you communicate those policies through online training programs and email follow-ups. We can even ensure that your employees have retained the information as time goes by.
Emphasize communication and approval.
Beyond communicating your policies, you’ll also want to encourage and maintain an open line of communication between your cardholders and your management. There very well could be times when common sense and good judgment warrant going over spend limits. However, a decision to make an exception to any rule should only be made with management input and approval.
Through Card Integrity’s training, you can encourage employees to always use the correct communication pathways to gain approval first, before making any decisions on their own to breach a spend limit.
Place hard spend limits on card accounts.
You can eliminate much of your overspending that takes place via P-Cards and Travel Cards by placing “hard” spend limits on those accounts. Once that limit is reached, the card will no longer work. It stops the overspend behavior dead in its tracks. It also forces the cardholders to be more cognizant of their own behaviors. It’s embarrassing to attempt to use a P-Card that won’t be accepted by a vendor. Most employees won’t put themselves in that same position twice.
Track spending and behavior.
However, as we mentioned earlier, some cardholders figure out ways around those hard stops, typically by using other cards or accounts for the same transaction or category of product.
Through our “Data-Wise” solution, Card Integrity tracks transactions — and the behaviors surrounding those transactions — so that you can identify the spend limit breaches, as well as the non-compliant employees behind them.
You also need to make sure that the right purchases are being made via the right payment method, and that any corresponding spend limits are correctly followed. Many purchases are fulfilled in an ERP (enterprise resource planning) system, while MRO (maintenance, repair, and operations) supplies typically require payments on a P-Card. Travel expenses could appear on Travel Cards or other designated cards such as the One Card. Each method and vendor category will have its own individual spending limits.
Attempting to cross-check across all payment methods and vendor categories can make for a real headache when done manually, and the risk of improper review and making mistakes is high.
But data monitoring services by Card Integrity can check across payment methods quickly and easily, to ensure that purchases have gone through their correct payment types and that spend limits were maintained.
Learn more about what else could be lurking across payment types other than overspending. Read the article, “4 Types of Employee Fraud That Could Hide in Your Corporate Expenses and Across Payment Methods“.
Direction and oversight solve the problem
Upfront direction and correctly performed oversight will go a long way in helping your employees adhere to your spend limits. But there’s no reason why you need to go it alone. If you find that your company doesn’t have the necessary resources or experience to do it properly, Card Integrity can help. Call us at 630-501-1507, or contact us via our online form today to learn more.