Indirect Spend Archives : Planergy Software

Discretionary Expenses: What Are They, Examples, and How To Control Them In Business

Rob Biedron — Fri, 08 Sep 2023 15:18:54 +0000

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Where the best opportunities for savings are in indirect spend.
How to gain visibility and control of your indirect spend.
How to report and analyze indirect spend to identify savings opportunities.
How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

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Discretionary Expenses: What Are They, Examples, and How To Control Them In Business

Category

Spend Management

Written by Rob Biedron
18 min read

Tags

Last edited

July 2, 2024

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KEY TAKEAWAYS

In business and personal finance, many essential expenses are the same. These are what you have to pay to keep business running as usual (or to maintain a home, job, etc.)
Discretionary spending is what you choose to spend – it’s not required to keep things running – but is nice to be able to do.
Budgeting isn’t optional if you want to make the most of your money.

Discretionary expenses are costs that are not essential for the maintenance of a home or business.

These expenses can be adjusted or eliminated depending on an individual’s or a company’s financial situation and priorities.

When finances are tight these will be the costs that you can cut when tightening your belt.

In this article, we will explore discretionary expenses in both personal and business contexts, including their definition, examples, and best practices for managing them.

Discretionary Expenses in Personal Finance

In a household setting, discretionary expenses are incurred for non-essential items such as entertainment, vacations, and hobbies.

These expenses are considered discretionary because they are unnecessary for maintaining a basic standard of living, unlike non-discretionary expenses such as housing, utilities, groceries, and transportation.

Some examples of discretionary spending, or non-essential expenses in households include:

Entertainment

Entertainment expenses can include many activities that provide enjoyment and relaxation.

These may consist of movie tickets, streaming service subscriptions, concert tickets, and other forms of amusement.

While entertainment is essential for personal well-being, it is not necessary for maintaining a basic standard of living, making it a discretionary expense.
Vacation

Vacation expenses encompass all costs related to travel and leisure, such as hotel stays, airfare, car rentals, and sightseeing.

These expenses are considered discretionary because they are not required for day-to-day living and can be adjusted or postponed based on an individual’s financial situation.
Hobbies

Hobby-related expenses include the costs of pursuing personal interests and passions, such as art supplies, sports equipment, club memberships, and classes.

These expenses are discretionary because they are not essential for maintaining one’s basic needs and can be reduced or eliminated.

Essential Expenses

Essential expenses are the costs necessary for maintaining a basic standard of living.

These expenses are fundamental to your well-being and cannot be eliminated without significantly impacting on your quality of life.

Examples of Essential Expenses

Rent or Mortgage Payments

Rent or mortgage payments are essential expenses for maintaining a place to live. They represent the monthly cost of occupying a residence, whether a rental property or a home purchased through a mortgage loan.
Property Taxes

Property taxes are levied on homeowners by local governments and are based on the property’s assessed value. These taxes contribute to funding public services such as education, public safety, and infrastructure.
Homeowner’s Insurance

Homeowner’s insurance is a policy that provides financial protection against damage to your home and personal belongings due to events like fires, storms, or theft. It may also cover liability for accidents that occur on your property.
Utility Bills

This includes things like your electricity, water, gas, etc. Other essential utilities may include basic telephone service, trash removal, and sewer services.
Food Expenses

Groceries are an essential expense, as they provide the food necessary for daily sustenance and nutrition.

Basic dining expenses include occasional meals at affordable restaurants or takeout options. Luxury or non-essential dining experiences are considered discretionary expenses.
Travel Expenses

Costs associated with commuting to work may include public transit fares, carpooling fees, or parking expenses.

Car payments are a necessary expense if you have financed the purchase of a vehicle through a loan.

Fuel costs are essential for vehicle operation and depend on fuel efficiency and driving habits.

Auto insurance premiums provide financial protection in case of accidents or other incidents involving your vehicle.
Health Insurance Premiums

Health insurance premiums are paid to maintain coverage for medical expenses, including doctor visits, hospital stays, and prescription medications.
Medication and Specialized Treatments

Medication costs include prescription drugs and over-the-counter medicines required to maintain good health. You may also need to pay for medical devices, therapy, or other specialized treatments.
Minimum Payments on Credit Cards

Credit card debt payments are essential to avoid late fees, maintain a good credit score, and eventually eliminate debt.
Student Loans

Student loan payments are necessary to repay educational loans and avoid defaulting on the debt.

Many of these essential personal expenses also translate to the business world. You must pay for your building/offices/product facilities (whether through rental or mortgage), utilities, credit cards, loans, etc.

While you don’t necessarily have to pay for employee healthcare expenses but if you choose to offer benefits, that benefits package becomes an essential expense.

Discretionary Expenses in Business

In a business context, discretionary expenses are costs that can be adjusted or eliminated without directly impacting the company’s core operations.

These expenses often vary across departments, such as marketing, human resources, and operations.

Examples of discretionary expenses in various business areas include:

Employee Perks and Benefits

Employee perks and benefits are incentives offered to employees beyond their regular salary.

These include gym memberships, team-building events, workplace wellness programs, tuition reimbursement, retirement planning, and flexible work arrangements.

While these perks can improve job satisfaction, employee engagement, and staff retention, they are considered discretionary because they are not essential for the day-to-day functioning of the business.
Office Decor and Aesthetics

Office decor and aesthetics involve the design and layout of your workspace, including furniture, artwork, and other decorative elements.

The basic elements of desks, chairs, and computers will be a required part of the office management setup to cover core business operations. Above and beyond that it will depend where the leadership team want to draw the line.

These expenses can create a comfortable and visually appealing work environment, positively impacting employee morale and productivity.
However, they are considered discretionary expenses because they do not directly affect the business’s core operations.
Professional Development and Training Programs

Investing in professional development and training programs for your employees can enhance their skills, knowledge, and overall performance.

These programs may include workshops, seminars, conferences, or online courses.

While professional development can benefit your business in the long run, it is considered a discretionary expense because it is not essential for daily operations.
Non-Essential Software Subscriptions

Non-essential software subscriptions refer to tools and applications that are not crucial for the daily functioning of your business but may offer convenience or additional features.

Examples include project management tools, graphic design software, and social media scheduling platforms.

These might be paid for on behalf of the member of staff or handled by an expense reimbursement fulfilled based on a properly returned expense report.

While these subscriptions can provide value, they are considered discretionary expenses because they are not vital to your business’s core functions.
Business Travel and Entertainment Expenses

Business travel and entertainment expenses include attending conferences, networking events, trade shows, client meetings, employee outings, and recreational activities.

If travel and expense management practices are poor, or worse if there is no travel and expense policy in place, these expenses can get out of hand when financial circumstances are strong.

This makes them an ideal candidate for cutting back on when times are hard.

These expenses can help build relationships, foster collaboration, and expand your business network. There is a lot of value to the business created when this expenditure is managed correctly.

However, they are discretionary because they are not required for the business’s day-to-day operations.
Donations and Sponsorships

Donations and sponsorships are voluntary contributions a business makes to support charitable causes, community events, or industry initiatives.

These expenses can improve your company’s reputation and public image, but they are considered discretionary because they do not directly impact the core functions of your business.

Monitoring and controlling discretionary expenditures is crucial for businesses, as it can significantly impact overall expenses and help avoid potential financial setbacks.

Distinguishing Between Essential and Discretionary Expenses

The primary difference between essential and discretionary expenses lies in their necessity for maintaining a basic standard of living.

Necessary expenses are fundamental and cannot be eliminated without negatively impacting one’s quality of life.

Discretionary costs, however, are non-essential and can be adjusted or eliminated based on an individual’s financial priorities.

To effectively manage your finances, it’s crucial to distinguish between these two types of expenses.

By categorizing your expenses as either essential or discretionary, you can better identify areas where spending can be reduced and allocate resources more effectively.

In most cases a split of direct and indirect expenditure is a good starting point. Indirect spend categories are where you likely find the majority of your discretionary expenses.

Improving how you manage indirect procurement will have a lot of benefits for your indirect procurement process now but can also help if you need to review what expenses you can cut out without impacting core operations.

In times of financial hardship, it’s crucial to prioritize essential expenses and cut back on discretionary spending.

Focus on maintaining the core functions of your business, including paying employees, keeping the lights on, and ensuring that your products or services are still available to customers.

Reducing non-essential spending can help your business weather the storm and emerge stronger when conditions improve.

Closely monitoring spending and comparing it to your budget can help control expenses.

Best Practices for Managing Discretionary Expenses

Create a Clear Budget

Establishing a comprehensive and strategic budget is crucial for effectively managing discretionary expenses.

A detailed budget should outline all discretionary and non-discretionary expenses, making it easier to identify areas where spending can be reduced.

Both individuals and businesses can benefit from tracking their income and expenses, setting spending limits, and prioritizing financial goals.
Regularly Review Spending

Periodically assessing spending habits is essential for identifying and eliminating unnecessary expenses or areas of overspending.

By regularly reviewing bank statements, credit card transactions, and expense reports, individuals and businesses can gain better control over their finances and adjust as needed to stay within their budget.

For businesses, a dedicated spend management software, like Planergy, with automated spend analytics and drill down reporting makes this much easier.
Negotiate with Suppliers

Seeking better deals or alternative options for products and services can lead to significant cost savings for both individuals and businesses.

Negotiating with suppliers, comparing prices, and exploring different vendors can potentially secure more favorable terms and reduce discretionary expenses.
Encourage Employee Cost-Saving Efforts

Implementing company-wide initiatives that promote cost-saving behaviors among employees can help businesses manage their discretionary expenses more effectively.

These initiatives may include offering incentives for cost-saving ideas, providing training on expense management, and encouraging employees to be mindful of their spending habits.

By fostering a cost-conscious culture within the organization, businesses can reduce expenses and improve their financial health.

Using Software to Manage Discretionary Expenses

Software solutions, such as Planergy’s spend management software, can be instrumental in better management of discretionary costs.

By tracking spending, identifying areas of overspending, monitoring employee spending habits, and providing detailed reports for more accurate budgeting you can improve the management of discretionary spend.

Tools like this ensure you have enough money to cover mandatory spending and can appropriately plan for discretionary items.
Some common questions about using software to manage discretionary expenses include:

Can the software integrate with existing financial systems?

Planergy, and many other expense management software, can integrate seamlessly with popular accounting systems and ERPs, making tracking and analyzing expenses easier.
How customizable are the reports?

Planergy offers customizable reporting options and dashboards, allowing businesses to focus on specific areas of concern or interest. Create standard reports, schedule them, and use spend analytics software to gain better insights.

This is not standard for all spend management software. Often they include basic reporting options without significant flexibility.
Is the software user-friendly?

Look for a solution that is easy to use and offers accessible customer support. If you fail to achieve user adoption across the company, you will be missing out on valuable data.

Understanding and managing discretionary expenses is vital for both individuals and businesses to maintain healthy finances.

By implementing best practices and utilizing tools such as expense management software, it is possible to gain control over discretionary spending and make informed decisions that benefit overall financial health.

Whether business or personal, financial planning and saving money when and wherever possible is important.

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What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

We’ve helped save billions of dollars for our clients through better spend management, process automation in purchasing and finance, and reducing financial risks. To discover how we can help grow your business:

Read our case studies, client success stories, and testimonials.
Visit our Procure-to-Pay Software page to see how Planergy can digitize and automate your P2P process saving you time and money.
Learn about us, and our long history of helping companies just like yours.

2. Download our “Indirect Spend Guide”

Download a free copy of our guide to better manage and make savings on your indirect spend. You’ll also be subscribed to our and notified about new articles or if have something interesting to share.

3. Learn best practices for purchasing, finance, and more

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The post Discretionary Expenses: What Are They, Examples, and How To Control Them In Business appeared first on Planergy Software.

Manufacturing Overhead Formula: What Is It And How To Calculate It

Mary Girsch-Bock — Thu, 23 Jun 2022 11:10:06 +0000

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Manufacturing Overhead Formula: What Is It And How To Calculate It

Category

Finance

Written by Mary Girsch-Bock
15 min read

Tags

Indirect Spend Manufacturing Procurement

Last edited

June 24, 2024

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To properly calculate the cost of goods sold, it’s important for manufacturing businesses to accurately calculate their manufacturing overhead rate.

In manufacturing, you have direct costs, which are costs directly associated with the production of the product, and indirect costs, which are not directly related to production but are still necessary.

Direct costs tend to be variable costs and are associated with production levels, while indirect costs tend to be fixed costs.

Manufacturing overhead is the total of all indirect costs associated with manufacturing a product.

According to the generally accepted accounting principles (GAAP) rules, manufacturing overhead costs should be allocated to both work in progress (WIP) inventory and finished goods inventory on your balance sheet.

This allocation is vital to ensuring accurate financial statements.

Keep in mind that manufacturing overhead expenses must also be included in your cost of goods sold (COGS) that is listed on the income statement.

What is total manufacturing overhead?

Total manufacturing overhead is the sum of all of the indirect costs associated with manufacturing a product.

Indirect costs are costs that are associated with product production.

Indirect costs use an overhead absorption rate to calculate costs per unit.

For example, some manufacturing companies may use labor hours as a cost driver, while others use machine hours to calculate associated overhead.

Common overhead costs include:

Indirect materials

While direct materials are included in total manufacturing costs, indirect costs must be calculated as well.

For example, if you manufacture wood tables, the cost of wood would be a direct cost, while the cost of cleaning supplies would be considered an indirect material cost.

Indirect labor

Production employees such as those working the machines are always included in direct costs.

However, the wages of those not directly associated with production such as plant managers and supervisors, and janitors must also be included in factory overhead as an indirect cost.

Utilities

Utility overhead can vary based on production, with costs lower with slowed production; ramping up when production does.

Since utilities are used throughout the business, not just for the production facility, accountants are tasked with allocating the proper amount to overhead as an indirect cost.

Depreciation

Monthly depreciation expense must be included in overhead as in indirect cost. Only production-related equipment must be included in the indirect overhead cost.

For example, if your monthly depreciation expense is $2,500, but only $1,500 is related to manufacturing-related equipment, you should only include $1,500 in your indirect costs for the month.

Associated financial costs

Associated financial costs such as rent or mortgage expenses, as well as insurance and property tax expenses, should be included as an indirect financial cost when calculating manufacturing overhead.

While direct materials and labor account for the majority of manufacturing costs, not including overhead expenses can directly impact your bottom line.

What are the steps to calculate the manufacturing overhead?

There are four steps involved in calculating manufacturing overhead.

Calculate all indirect costs

Step 1 is the most important, so make sure to include all of your indirect costs. A common error is including obvious indirect costs, but leaving others out, resulting in an inaccurate overhead cost, and ultimately, an understated cost of goods sold.

Determine which allocation base to use

The overhead percentage rate is calculated by adding all of your indirect costs and then dividing them by a designated measurement such as labor costs, sales totals, or machine hours.

If you have a very labor-intensive job site, you should use direct hours, while machine hours can be helpful for a more automated environment. You can also choose to use total sales for your base as well.

Find your base totals

If you plan on using direct labor hours, you’ll need to calculate the total labor hours worked for the month.

The same goes with machine hours if you’re planning on using that for your base calculation.

Calculate overhead rate percentage

Once you’ve calculated all of your indirect expenses, you’ll need to complete another calculation for your overhead rate percentage.

For example, if your total monthly sales were $850,000, and your monthly overhead costs were $400,000 your overhead rate for the month would be calculated as follows:

$400,000 / $850,000 = $0.47

This means that for every dollar that you’re currently earning in sales, you’re spending $0.47 in expenses.

For labor costs, you would divide total indirect costs by total labor hours. For example, if you had 18,000 hours of direct labor, your calculation would be:

$400,000 / 18,000 = $22.22

This means that you’ll need to add $22.22 for each hour worked to accurately account for your overhead costs when preparing your financial statements or when calculating the cost of goods sold.

What is the difference between manufacturing overhead and total manufacturing cost?

Manufacturing overhead is the total of your indirect costs that are involved in production while manufacturing cost is the overall cost of manufacturing a product, which includes both direct costs such as labor, as well as any indirect costs.

Manufacturing overhead is always calculated using indirect costs, while total manufacturing cost also includes the cost of raw materials, direct labor, and overhead costs.

Though some may confuse total manufacturing cost with the cost of goods sold, total manufacturing cost includes all finished products within a specific period regardless of whether they have been sold or remain in inventory.

What is the formula for total manufacturing cost?

The formula for calculating manufacturing cost is:

Total manufacturing cost – Direct materials + direct labor + manufacturing overhead

Direct materials

Direct materials are the costs associated with any materials that are directly used in the production of a product. To measure the cost of materials, use the following formula:

Beginning Inventory + Added Purchase – Ending Inventory = Direct Materials Cost

Direct labor

Direct labor is the cost of wages of all employees that are directly involved in the manufacturing process, such as machine operators or those on an assembly line.

Whether calculating direct labor costs or direct labor hours, be sure to include all related expenses such as payroll taxes and benefits, but make sure you’re only doing so for employees directly involved in the production process.

Manufacturing overhead

Discussed above, manufacturing overhead is all of your indirect costs calculated and properly allocated.

These would include building rent or mortgage, property taxes, maintenance supplies such as paper products, and oils or lubricants for manufacturing equipment.

For example, Fran’s Furnishings makes custom wood bookcases, shelving, and tables.

The primary materials used in production are wood, wood glue, varnishes, paints, as well as nails. They use special cutting equipment to prepare the materials, but production is heavily labor-intensive. This is their 2021 costs:

Direct Materials – $400,000
Direct Labor – $1,100,000
Overhead – $ $145,000

Added together, Fran’s Furnishings had a total manufacturing cost of $1,645,000.

You would have to do further analysis of this number to determine whether the company is making a profit or needs to reduce costs.

How do you calculate manufacturing overhead from WIP?

While calculating overhead costs is an important step in producing accurate financial statements, not all of these calculations take place after work has been completed. At times, you’ll also want to calculate your manufacturing overhead costs directly from WIP or work in progress.

Before calculating manufacturing overhead from WIP, you’ll first need to determine the WIP ending balance for the period. The formula for calculating your WIP balance is:

WIP Beginning Balance + Manufacturing Costs – Cost of Goods Completed

For example, if your WIP at the start of the year is $325,000 and your manufacturing costs are $750,000, with the cost of completed goods at $685,000, your ending WIP balance for the year would be $390,000.

To calculate manufacturing overhead for WIP, you’ll need to determine your base.

For example, if you’re using units produced, you would need to first determine your total cost for each unit. For this example, we’ll say that each manufacturing unit cost $87.78 in direct labor and materials, with $22.22 added on for overhead costs, for a total cost of $110.00 per unit.

You’ll first have to calculate the portion of overhead.

$22.22 / $110.00 = 0.20

You’ll then multiply your WIP total by 0.20 to finish the calculation:

$390,000 x .20 = $78,000

The calculation tells you that your manufacturing overhead for WIP is $78,000.

How do you calculate manufacturing overhead from WIP when using the batch costing method?

Batch costing is very similar to traditional job costing with one major difference. Instead of using a single unit to determine the cost, you use a batch of identical units.

For those that mass produce items, batch costing can be useful. The following are some of the characteristics of the batch costing process:

Each batch is considered a unit of production
Each batch should be identical in output
Direct costs should be allocated to each batch
Indirect costs should be applied to each batch using the appropriate overhead rate

The process for calculating manufacturing overhead from WIP using a batch costing method is similar to one using a single unit measure.

But instead of calculating the total cost for each unit, you would need to calculate the total cost of each batch

Why is it important to calculate manufacturing overhead?

While direct materials and labor account for the majority of manufacturing costs, not including overhead expenses can directly impact your bottom line.

If you only calculate direct costs in your cost of goods sold, you are likely pricing your products too low.

For example, if your direct costs to manufacture a small table are $45 and your indirect costs are $12, you’ll know that your total manufacturing cost is $57, and can price your product accordingly.

But pricing based solely on direct costs will likely result in a product priced too low and a reduced profit margin.

Knowing your total manufacturing cost, including overhead can help you more accurately price products while also reigning in expenses when necessary.

Download PDF

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

Read our case studies, client success stories, and testimonials.
Visit our “Solutions” page to see the areas of your business we can help improve to see if we’re a good fit for each other.
Learn about us, and our long history of helping companies just like yours.

2. Download our guide “Preparing Your AP Department For The Future”

Download a free copy of our guide to future proofing your accounts payable department. You’ll also be subscribed to our and notified about new articles or if have something interesting to share.

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

The post Manufacturing Overhead Formula: What Is It And How To Calculate It appeared first on Planergy Software.

How To Manage Discretionary Costs

Keith Murphy — Fri, 13 Aug 2021 15:32:25 +0000

Download a free copy of "Indirect Spend Guide", to learn:

Where the best opportunities for savings are in indirect spend.
How to gain visibility and control of your indirect spend.
How to report and analyze indirect spend to identify savings opportunities.
How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Download Free Copy

How To Manage Discretionary Costs

Category

Spend Management

Written by Keith Murphy
13 min read

Tags

Indirect Spend Procurement

Last edited

June 5, 2024

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Cost management is critical during a financial crisis and may be the only way to keep a business sustainable.

High expenses mean that a company needs to generate a substantial amount of capital to reach the break-even point.

However, all costs aren’t equal. Non-discretionary expenses or mandatory costs, can’t be cut without running the risk of causing serious damage to the company. These are essential expenses which are integral to running the business.

Mandatory or non-discretionary expenses like salaries, rent, and insurance expenses must be paid to avoid legal ramifications or to avoid shutting down completely.

When it’s necessary to reduce the budget, cost-cutting has to come from discretionary funds since cutting essentials costs is risky and often impossible.

A number of expenses can be cut without causing serious damage to a business that are discretionary or managed costs.

A discretionary cost, discretionary expenditure, is an expense that can be forestalled or eliminated in the short-term without negatively affecting a business’s short-term profitability.

A company may decide to reduce discretionary costs if it finds itself with cash flow difficulties, or if it wants to present more favorable financial statements.

Discretionary funds shouldn’t be reduced for a prolonged period since this can present a number of challenges.

Managing discretionary costs wisely is important because it can’t be a long-term strategy. While these costs can be paused they need to be paid to stay in business at a minimum.

Managing discretionary costs allows companies to pinpoint where they can make cuts to save money during financial difficulties. Discretionary costs will vary depending on the business and it’s specific needs.

Examples of Discretionary Costs

The most important thing to remember is that discretionary costs will not be the same for every company.

What may be discretionary to one company may be non-discretionary to another. In general, these are the areas where most companies can choose not to invest in for the short-term future.

Marketing

Although marketing isn’t optional for the majority of businesses, it does encompass a large number of areas that can be examined for ways to reduce costs.

Some discretionary items found in the marketing budget include advertising, events, video production, agencies and freelancers, collateral, and public relations.

Deciding where to cut back can be challenging but make it easier by applying the Pareto Principle. 20% of a company’s business comes from 80% of its customers.

Focusing the marketing team’s efforts on these ideal customers will be crucial. Finding the events, social media sites, websites where they can be found and reaching them there will generate the highest ROI.

Investments

There are potential discretionary investments that a company may make to propel growth and diversify its income streams.

These may include real estate, mergers and acquisitions, research and development, and stocks.

If investing in R&D is profitable and key to positioning the company as an industry leader, then this would be an investment strategy worth keeping.

Investing in stocks is geared towards long-term gains, so this might be an area that can be put off until the company’s financial picture improves.

The same can hold true for real estate investments. There may be some cases in which it makes sense for a company to purchase a piece of real estate, a warehouse, or office building because it’s more cost-effective. In a buyer’s market, this may be an instance where it would be prudent to go ahead with the deal.

Travel

Travel can be a necessary part of a company’s initiatives. However, travel is still mostly discretionary. Company travel can include:

Attending trade shows and conference
Board meetings
Client meetings
Sales trips including cold calling for new clients
Visiting branches, satellite offices, factories, warehouses, and production spaces

While these trips can be important they are not considered non-discretionary. Managing corporate travel effectively is essential for a profitable, well-run company.

There are many tools available that can serve as a substitute for travel. Conference calls, video conferences, and combining trips can be manageable and cost-effective ways to reduce a travel budget.

Subscriptions (SAAS)

Some company subscriptions are essential, for example, web hosting or payment processing software. But, there are often lots of subscriptions that can be considered discretionary.

Examples of services to review:

Communication tools like Slack
Sales and marketing customer relationship management services (CRMs)
Business suites (Microsoft Office)
Planning and project management tools like Trello, Asana, or Basecamp

Some of these services have become so commonplace that it may seem impossible to do without them. But there are lower-cost alternatives, and in reality, they are not essential in many cases.

Team Benefits and Perks

In order to attract top-tier talent and create a positive environment, many companies offer generous benefits. They may not be essential, but they have become a core part of company culture at many businesses.

Team building events, games, exercise classes, gym memberships, company cars, entertainment, parties, and food and drink are some typical examples.

Cutting back on some of these benefits may take a little bit of creativity, but it can be done. Possible solutions include finding lower-cost alternatives or being transparent about the reason the changes are being made.

It’s important to navigate this carefully if your employees are in high demand by your competitors.

Building Maintenance and Office Improvements

On the heels of team benefits and perks comes providing a comfortable work environment. Some companies have set aside space for comfortable couches and video games for employee breaks, while others provide nap rooms.

And while those perks may not be common, plants, upgraded ergonomic chairs, well-appointment breakrooms, and replacing furniture are considered part of keeping employees happy and comfortable.

These are all wonderful ways to foster a positive work environment and cement the company culture. But, they are also the very definition of discretionary expenses.

On the other hand, routine building maintenance can prevent the need for costly repairs that can come at a time when you need to limit your expenses.

Spend Management Systems

A company’s strategic spend which includes salaries, rent, insurance, raw materials, and other fixed costs are fairly predictable.

These payments are made on a regular schedule to the same people, in the same way.

Discretionary costs tend to be different from quarter to quarter and that makes managing them more difficult.

Setting up a centralized spend management system will allow the company to track all expenses, including discretionary spending.

There are several tools which are essential for proper and effective tracking:

Approval tracking so it’s clear who approved each expense
Variable limits and budgets to simplify budgeting for each department or team
User-friendly receipt upload so that receipts are located in a central location
Payment logs for the ability to check every individual payment
Flexible methods of payment (virtual cards for online, physical cards, invoicing software, etc.)

Important Takeaways

Cutting costs presents an enormous challenge because discretionary costs are harder to keep track of because they’re so variable.

And because budgets for discretionary spending allow managers to spend the money at their discretion, it can be difficult to account for it.

Managing discretionary costs is the key to making the right cuts.

Here are some key things to consider:

A good definition of discretionary costs is that they are not essential to the day-to-day operation of the business and can be reduced or eliminated in the short-term. They can be thought of as “wants” instead of “needs”.
Discretionary spending includes a wide range of expenses across all departments and teams.
Some expenses may still be completely necessary for a specific business even if they’re not technically “essential”.
Discretionary costs are so varied and are not fixed costs. This makes them hard to manage, even for a company’s finance team.
Adopting a spend management system will ensure that a business can account for all expenses, discretionary and otherwise. Once this system is in place, accountability will be easier to manage.

There are many reasons why a company may need to reduce expenses. A recession or economic downturn, or a few less than stellar quarters can make it necessary to protect the business.

Companies that sell non- essential products and services, or luxury goods can be cyclical. They have to be proficient at controlling their costs.

Learning how to manage discretionary costs by keeping track of expenses and analyzing which discretionary costs can be cut in the short-term without jeopardizing the company’s stability, will give a business the breathing room it needs to recover.

Download PDF

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

Read our case studies, client success stories, and testimonials.
Visit our “Solutions” page to see the areas of your business we can help improve to see if we’re a good fit for each other.
Learn about us, and our long history of helping companies just like yours.

2. Download our guide “Indirect Spend Guide”

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

The post How To Manage Discretionary Costs appeared first on Planergy Software.

Calculating Indirect Cost Rate for Non-Profits

Lyle Del Vecchio — Tue, 20 Apr 2021 15:01:58 +0000

Download a free copy of "Indirect Spend Guide", to learn:

Where the best opportunities for savings are in indirect spend.
How to gain visibility and control of your indirect spend.
How to report and analyze indirect spend to identify savings opportunities.
How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Download Free Copy

Calculating Indirect Cost Rate for Non-Profits

Category

Spend Management

Written by Lyle Del Vecchio
24 min read

Tags

Financial Ratios Indirect Spend Not For Profit

Last edited

December 15, 2023

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Just like their commercial counterparts, nonprofit organizations need effective ways to manage their income and expenses if they want to reach their goals. And also like for-profit organizations, some nonprofits struggle with drawing a line between direct and indirect expenses. For these organizations, failing to accurately calculate and manage their indirect cost rates can have an adverse effect on their operational continuity, overall financial health, and ability to secure funding.

With various stakeholders demanding accurate results and sometimes complex cost allocations to make, calculating the indirect cost rate for a nonprofit can seem daunting. However, with careful planning and a clear understanding of the requirements involved, nonprofit organizations can provide accurate financial statements and secure the funds they need to support their programs and achieve their organizational goals.

Why Calculating Indirect Cost Rates Matters for Nonprofits

Nonprofit organizations obtain funding in a number of ways, including direct funding by their founder (private charities) and, more commonly, fundraising efforts public and private, including pursuing grants from the government and other sources.

Whatever the case, obtaining funding almost always comes with strings attached; namely, nonprofits need to account for how they’re spending the money they receive—including both direct and indirect expenses.

Accurate financials not only demonstrate to investors, grant agencies, and other stakeholders that the money they’ve provided is being put to good use, but also help ensure the nonprofits get the funds they actually need to fund their activities and complete their stated goals.

Nonprofits often struggle to accurately calculate their indirect costs and the amount those costs contribute to their total spend (i.e., their indirect cost rate). As defined by Section 200.56 of the Code of Federal Regulations (CFR), indirect costs include all costs “incurred for a common or joint purpose benefitting more than one cost objective, and not readily assignable to the cost objectives specifically benefited, without effort disproportionate to the results achieved.”

Examples include:

Human resources.
Office Supplies.
Insurance expenses.
General administration and overhead.
Utilities
Accounting and auditing services.

In practice, these categorizations effectively boil down to support costs. For example, a nonprofit literacy organization’s direct expenses will likely include salaries and benefits for tutors and instructors, books and other materials, and rent on facilities where reading programs take place. These expenses can be directly connected to a specific grant or other source of funding on financial documents, and allocated accordingly.

On the other hand, the program’s accounting, IT, and marketing services support all the organization’s programs and business activities (i.e., cost objectives), and so will be classified as indirect.

It can be difficult to connect these support costs to specific projects and programs without the right practices and tools. Other challenges nonprofits face in managing their indirect costs include:

A lack of universal standards for indirect allocation rates and methodologies. Rate caps can be arbitrary, are often set by donors, and limit practical recovery of indirect costs.
Different sources of funding can have different standards for allowable and non-allowable expenses.
The Generally Accepted Accounting Principles (GAAP) provide no specific requirements or cost principles for indirect cost allocation. In general practice, allocation methodologies are often left to management’s discretion.
Donors can review and question allocations, demanding clarifications that effectively add to the total indirect costs generated by the organization.
Requests for higher indirect cost reimbursement caps are often countered with pressure to recoup those costs through unrestricted fundraising activities rather than reimbursement from donors/grantmakers/sponsoring agencies.

Despite these difficulties, it can be argued that accurately tracking and managing indirect costs is just as important (if not more so) than doing so for direct costs. Unmanaged, indirect costs can create an inaccurate representation of a nonprofit organization’s ongoing financial performance and its current and future needs. This, in turn, can make it difficult for those organizations to obtain sufficient funding to support their programs and meet their obligations.

Accurate financials not only demonstrate to investors, grant agencies, and other stakeholders that the money they’ve provided is being put to good use, but also help ensure the nonprofits get the funds they actually need to fund their activities and complete their stated goals.

Indirect Cost Allocation: Essential Terms

In order to successfully navigate indirect cost calculations and allocation, it’s helpful to understand the key terminology involved.

Direct Costs:

Those costs specifically incurred in furthering a program objective, such as direct salaries, equipment, materials, etc. Direct costs that benefit two or more programs are known as shared costs.

Indirect Costs:

Those costs incurred to support common or shared objectives and that cannot be readily connected to a specific final cost objective. These costs can be further broken into subtypes, including:

Overhead costs, including facilities, staff, and equipment used for programs.
General and administrative costs (G&A costs), e.g. finance, accounting, executive director salary and benefits, administrative facilities, etc.
Facilities and administrative costs (F&A costs), wherein facilities costs include use and depreciation of buildings and equipment, and administration costs are classified as G&A.

Indirect Cost Rate:

The rate used to allocate indirect costs across programs. This rate is generally established during negotiations with the funding agency (for federal entities) or grantmaker, and is either specified in the award agreement itself or established in a separate document known as a Negotiated Indirect Cost Rate Agreement (NICRA).

The most basic formula for calculating a grantee’s actual indirect cost rate is to divide total indirect costs (also called the indirect cost pool) by total direct costs (also called the direct cost base).

Indirect Cost Pool ÷ Direct Cost Base = Indirect Cost Rate

For example, if your organization’s indirect cost rate is 34%, it incurs $0.34 of indirect cost on every dollar of direct spend.

Reasonable, Allocable, and Allowable (RAA)

In determining how to calculate and charge indirect costs, remember that all qualifying costs are:

Reasonable: The cost supports operations. It is consistent, justifiable, and contributes to the organization’s ability to conduct its mission. It is both ordinary and necessary.
Allocable: The cost is connected to a cost objective and proportional to the benefits received.
Allowable: The cost meets the standards established by the funding body. These standards might include those set for federal grants by the Office of Management and Budget (OMB), Uniform Guidance Standards for Federal Awards (also set by the OMB), specific grant provisions from local governments, etc.
Note: While they support the overall survival and mission of the nonprofit organization, fundraising activities to secure funding beyond that awarded by the grantmaker, cognizant agency (i.e., the federal agency with the largest financial stake), etc. are generally not classified as allowable.
Lobbying costs, creating and maintaining donor mailing lists, special fundraising events, fundraising materials and related expenses, and any activities involving the direct and formal solicitation of additional funds from any source are all generally considered to be unallowable.

What is the Average Indirect Cost Rate for Nonprofits?

While no two nonprofit organizations will have identical needs, structures, or budgets, an indirect cost rate of between ten and fifteen percent has served as a longstanding rule of thumb.

For non-federal entities who’ve never held a negotiated rate with the federal government, the “De Minimis” rate is set at 10% of the organization’s Modified Total Direct Costs (MTDC).

However, 2016 research conducted by the Bridgespan Group found an average indirect cost rate of 40% for the organizations it surveyed.

This disparity is more than noteworthy; it is a compelling argument for nonprofits to take the most accurate and complete indirect cost rate calculation approach possible.

Nonprofits operating under a flat cap of ten or even fifteen percent for estimated costs in their indirect spend can fall into a “starvation cycle,” wherein the nonprofit’s ability to cover the costs of doing business hampers growth, limits infrastructure investment, and can strain or even damage relationships between nonprofits and the donors, investors, and grantmakers that support them.

Best Practices for Calculating Indirect Cost Rates for Nonprofits

Regardless of their mission, nonprofits can gain better control over their indirect costs, calculate them more accurately, and make better financial planning decisions by following a few simple best practices.

1. Understand Your Available Allocation Methods

CFR part 200.56 says “Indirect cost pools must be distributed to benefited cost objectives on bases that will produce an equitable result in consideration of relative benefits derived.”

Translated from grant-speak, this effectively means all indirect costs must be somehow connected to the programs and activities of the nonprofit organization allocating those costs, using a cost allocation plan (CAP).

Organizations approach allocation in a number of ways.

Direct allocation charges programs for all costs directly, as determined by the direct base.
Simple allocation (“Simple Method”) uses a single rate. Nonprofits whose indirect costs benefit all their programs to the same degree can use the Simple Method.
The multiple allocation base method involves either two or three rates.
- Two-rate allocation separates fringe and overhead costs.
- Three-rate allocation is used when indirect costs have varying benefits for major programs and functions. It’s broken out by fringe, overhead, and G&A rates.

Let’s compare each of these methods. Organization Z has two grants; one from federal funds, one from a non-federal source. Each grant supports one distinct program.

In a direct allocation model, an expense such as rent on a facility would be allocated to both grants based on the square footage (for example) used by each program.

The indirect cost pool would receive an allocation based on the square footage used for indirect purposes (e.g., an office for an IT contractor servicing both programs). Let’s assume the total rent expense for the year is $1,000,000, and the total square footage is 100,000 square feet.

Program A uses 50,000 square feet, Program B uses 40,000 square feet, and IT uses 10,000 square feet.

Program A is charged $050,000 (50% of total square footage/occupancy).

Program B is charged $400,000 (40% of total square footage/occupancy)

The indirect cost pool is charged $100,000 (10% of the total square footage/occupancy).

In order for the cost allocations to be equitable and accurate, the direct cost base used (in this case, square footage) must be consistent and reasonably connected to the benefit provided.

In a simple allocation model, the indirect rate can be applied to the total direct cost base. So if the NICRA for each grant sets the predetermined rate for indirect costs at 10%, and the total rent expenditure was $1,000,000, then the indirect pool allocation would be $200,000 ($1,000,000 x .20 (two grants) = $200,000).

In a multiple allocation base method, both the cost of the program itself and the square footage used by each program (as well as IT services) may be considered in calculating the direct base, as indicated by the demonstrable benefits provided to each group by a given expense.

Indirect costs will then be calculated as above, but further granulated to specify G&A, fringe benefits, overhead, etc. In this model, fringe benefits are allocated based on salary and wages, while overhead gets allocated to Modified Total Direct Costs (MTDC).

2. Establish Your Indirect Cost Rate Calculation Process

Gather financial data.
1. Income and expense categories.
2. Detailed budgets.
3. Staff time sheets/work records, including compensation.
4. Detailed information on funded programs.
5. Any relevant grant and award agreements.
Define your funded programs.
1. Separate activities into discrete programs as necessary.
2. Establish cost centers for specific programs, G&A, and fundraising activities.
Identify direct and indirect costs.
1. Review all expense line items in the general ledger and classify as direct or indirect accordingly.
2. Provide detailed annotations for easy reference and auditing purposes.
Select your allocation method.
1. Keep it simple and consistent.
2. Common allocation methods include square footage, number of users, etc.
3. Formalize your methodologies and processes in writing.
4. Allocate all costs, including unallowable costs.
Allocate staff salaries and benefits.
1. These will likely be your largest expense.
2. Avoid allocating expenses based on job title.
3. Be as accurate as possible; guessing is a recipe for disaster.
4. If your executive director is working directly in one or more programs, be sure to allocate the time spent accordingly.
Allocate shared (direct and indirect) costs.
1. Charge any costs that can be 100% allocated to either a specific program or funding source or 100% allocated to indirect costs directly to their corresponding cost centers.
2. Track joint expenses over the accounting period in a generic department/cost center and then allocate them to their specific funding sources and cost centers (including the indirect cost pool) at the end of the period.
3. Indirect cost pools are spread across all appropriate funding sources, using the appropriate cost base.
4. Line-item allocation of indirect costs will reflect the appropriate cost base for each specific indirect line item.
Allocate joint costs (costs charged to both program activities and fundraising for the organization).
1. To qualify as joint rather than fundraising costs, items must:
  1. Include a specific call to action.
  2. Clarify the audience’s need and ability to meet the call to action.
  3. Show how the action performed supports the organization’s programs/mission.
Review your policy regularly.

3. Vigorously Monitor Allowable and Unallowable costs.

Depending on your sources of funding, you’ll likely spend a fair amount of time tracking what expenses are allowed and which aren’t—particularly if your primary funder is a cognizant agency within the federal government. The OMB circular covering nonprofits provides exhaustive guidelines in this regard.

Whether your funding is federally awarded or from a private or corporate source, it’s a good idea to stay abreast of what does and doesn’t qualify for your indirect cost pool in any given fiscal year, as they can affect your final rate for indirect costs.

Note that unallowable costs aren’t “forbidden,” per se (and should appear in your total general expenses); they just can’t be included in your indirect cost pool.

4. Invest in Procure-to-Pay Software

You’ll likely find it much easier to manage your financials and develop the controls and workflows needed for clear and accurate data with help from a comprehensive procure-to-pay solution.

With a best-in-class, bespoke solution such as Planergy, organizations of all sizes and types gain a range of benefits, including:

Transparent and complete capture of all spend data.
Full integration with your accounting system.
Robotic process automation supported by artificial intelligence improves the accuracy, speed, and efficiency of all your spend activities, bringing your estimated costs and actual costs into alignment.
Advanced analytics for real-time spend management and on-demand, audit-ready computation and reporting of critical financial data.
Powerful data mining capabilities yield insights that help nonprofits:
- Refine their workflows and optimize critical processes.
- Boosting return on investment (ROI).
- Create more accurate budgets and cost models to minimize waste and carry-forward.
- Manage MTDC more effectively.
- Manage cash flow and capital expenditures more effectively.
- Negotiate more accurate and sustainable indirect cost rate proposals, cooperative agreements, and NICRAs for primary and subawards.
- Shift from a cost-management model to one focused on total cost of ownership (TCO) and value creation.

5. Negotiate from a Position of Strength

Obtaining funding takes time, commitment, and tenacity. The process of creating your indirect cost proposal will be much easier. You’ll also find it easier to secure a satisfactory indirect cost rate if you have clear and complete financial data for your organization (which, again, is itself much easier to obtain if you have the right software tools).

Accurate and clear financial statements will simplify requesting funds and securing a favorable negotiated rate. It’ll also show potential donors, grantmakers, and investors awarding funds that your organization is accountable, competent, and fully invested in securing the best possible return on their investment.

Don’t forget to take advantage of resources provided by grantmakers and donors. USAID, for example, provides detailed indirect cost rate guidance for nonprofits, including explicit instructions on submitting a NICRA.

6. Avoid Common Allocation Errors

Set, enforce, and regularly review cost allocation policies.
Ensure all policies are formalized and in writing.
Don’t use unrestricted funds (or general funds) for allowable indirect costs.
Avoid “double dipping,” i.e. charging an expense to both direct and indirect costs.
Set and enforce best practices for employee timesheet documentation; ensure hours are charged to appropriate funding sources to avoid having those costs disallowed.
Ensure programs are being charged appropriately and fully; ensure you have a clear understanding of how your employees spend their time.

Don’t Let Unmanaged Indirect Costs Hamper Your Nonprofit’s Performance

Even nonprofits need a clear view of, and control over, the cost of doing business if they want to succeed. By identifying, tracking, and accurately calculating your indirect cost rate, you can make sure your nonprofit produces accurate, audit-ready financials, meets stakeholder expectations, and has all the funding it needs to get the job done.

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What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

Read our case studies, client success stories, and testimonials.
Visit our “Solutions” page to see the areas of your business we can help improve to see if we’re a good fit for each other.
Learn about us, and our long history of helping companies just like yours.

2. Download our guide “Indirect Spend Guide”

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

The post Calculating Indirect Cost Rate for Non-Profits appeared first on Planergy Software.

How to Manage Indirect Spend Categories

Rob Biedron — Fri, 16 Apr 2021 14:15:16 +0000

Download a free copy of "Indirect Spend Guide", to learn:

Where the best opportunities for savings are in indirect spend.
How to gain visibility and control of your indirect spend.
How to report and analyze indirect spend to identify savings opportunities.
How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Download Free Copy

How to Manage Indirect Spend Categories

Category

Spend Management

Written by Rob Biedron
17 min read

Tags

Category Management Indirect Spend

Last edited

May 20, 2024

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Imagine you’re trapped on a desert island, with limited food supplies. And instead of carefully looking for ways to extract every possible ounce of nutrition and renewable resources from every scrap of food in your tiny island larder, you take a bite or two out of, say, 40% of your meals and then throw them away.

That’s how many procurement organizations continue to approach indirect spend management, even in today’s competitive, data-driven economy.

Indirect spend categories can account for up to 40% of a company’s total expenditures—and that number climbs even higher at digital businesses whose indirect procurement occupies the role traditionally filled by direct procurement at more traditional organizations.

And yet, it is old-school cost management, rather than process optimization and value creation, which guides indirect spend management, creating an ever-widening competitive gap into which companies who stay the course may plummet.

In order to avoid this slow starvation, compete effectively, and capture the hidden cost savings and value buried in their supply chains, companies need a new, more proactive approach to managing their indirect spend categories.

Overcoming Challenges to Managing Indirect Spend Categories Effectively

The tendency many procurement teams have to place indirect spend management on the back burner is understandable, if regrettable. Using traditional methods, it’s more difficult, for example, to draw a straight line between indirect spend categories and profitability (e.g., properly-sourced information technology (IT) services leading to less downtime) than it is to connect business-critical direct procurement materials to the bottom line (e.g., copper and silicon used to manufacture a processor manufacturer’s chipsets).

Some of the most commonly used indirect spend categories include:

Facilities
Utilities
Marketing
Office supplies.
Technology purchases.
Human resources.
Travel
Outsourced services.

Despite its broad scope, managing indirect procurement represents a very specific set of challenges for organizations, including:

Greater complexity. While direct procurement might include only a few raw materials, indirect spend categories can run the gamut from office supplies to utilities to breakroom snacks to maintenance, repair, and operations (MRO) costs. With such a diverse array of products and suppliers, building an effective indirect category management team and plan requires a much greater breadth and depth of expertise than direct procurement.
In addition, indirect spend is focused internally rather than externally; the goods and services purchased support the entire organization, not just direct materials for production, and often fall under the umbrella of “the cost of doing business.” Without a clear spend management policy in place and the tools necessary to capture and manage all spend data, it’s all too easy for indirect spend to escape procurement’s control.
Finally, the value and savings created by an efficient and transparent indirect procurement strategy is more difficult for management to see without adequate data management, effective metrics (including key performance indicators, or KPIs) and process optimization. In those circumstances, it’s an uphill climb for procurement professionals to “connect the dots” and so key internal stakeholders such as upper management may not grasp the opportunities at hand.
Poorly managed or unmanaged spend. As they are more difficult to monitor and manage, indirect spend categories may receive only minimal management—or none at all. For companies who don’t have well-developed spend management or category management plans in place for indirect procurement, it’s all too common for maverick spend, invoice fraud, and outright theft to steal value and reduce return on investment (ROI) along with hobbling any hope of truly strategic sourcing.
High spend frequency and low spend volume. Indirect spend purchases vary widely in type, but are generally made frequently, have small individual values, and lower average spend totals than those made in direct categories do.
If the procurement team is still relying on last-gen tech or manual workflows and paper-based processes, it can be extremely difficult to secure optimal pricing and terms from suppliers, or identify and take advantage of opportunities to leverage economies of scale.

Without a clear spend management policy in place and the tools necessary to capture and manage all spend data, it’s all too easy for indirect spend to escape procurement’s control.

Tips for Managing Indirect Spend Categories More Effectively

In order to capture the overlooked potential savings opportunities offered by indirect spend management, procurement teams need to broaden their paradigm beyond “direct vs. indirect spend.”

A comprehensive approach, where both direct and indirect spend categories are successfully managed in concert with data-driven process optimization, is key.

Implementing such an approach means bringing indirect spend off the back burner and turning up the heat (so to speak) on identifying, measuring, and optimizing cost savings and value.

This is also part of an effective overall digital transformation strategy for procurement, where the focus shifts from cost management to value creation and strategic planning driven by data analytics, artificial intelligence, and automation.

Every company will have its own unique needs when streamlining its indirect spend category management. However, following a few basic tips can help you define your needs and leverage new technologies and tools to meet them.

1. Upgrade Your Toolkit

To liberate the savings and value in their indirect spend categories—and help their parent organizations compete effectively—procurement teams need new tools, including artificial intelligence, data analytics, and process optimization.

These three technologies are absolutely foundational to digital transformation in general and procurement optimization in particular.

Implementing a comprehensive, cloud-based and purpose-built solution such as Planergy gives procurement teams a powerful suite of tools required to optimize indirect procurement (and your entire procure-to-pay process).

Untangling even the most labyrinthine indirect procurement supply chain is much easier with:

Complete data transparency and full integration with all applications, including your existing enterprise resource planning (ERP) solution, office suites, marketing software, etc.
Process automation and robust internal controls support the capture of all transactions, help streamline verifications and approvals, and make it easier to measure supplier performance and compliance.
An end to maverick spend and invoice fraud.
Advanced supplier relationship management tools that can help you identify your best suppliers, consolidate spend to leverage economies of scale, etc. For example, outsourcing IT services, Internet hosting, and Website hosting to a single provider may allow your team to secure significant savings while still having a contingency plan in place with secondary suppliers.
Simplified inventory management and support for advanced AI-powered procurement processes such as automatic reordering when low levels are detected.
Support for KPIs and other metrics that can help you target specific savings opportunities for each spend category. Monitoring contract compliance, service level agreements, etc. can provide greater strength at the negotiation table and also reveal opportunities to partner with preferred suppliers for new materials, standardization of products, and more.
Advanced analysis and reporting tools that make it easier to move away from basic cost reductions and toward a total cost of ownership (TCO) and ROI model that provides clear connections between indirect spend management and value creation.

2. Update Your Strategy

With a centralized eProcurement solution in place, you can establish new protocols and sourcing strategies built around SAM: Spend management, Automation, and Metrics.

SAM helps procurement teams tame their indirect spend by ensuring it is fully visible, fully automated, and carefully monitored and analyzed.

Proactively managing indirect spend data supports continuous improvement initiatives and helps teams draw connections between that improvement and organizational goals such as profitability and competitive advantage for internal stakeholders.

SAM relies on advanced analytics and process management. Connecting indirect spending with generated value is much simpler when you follow a basic three-step approach.

A detailed spend analysis is the essential first step. A detailed breakdown of indirect spend will provide you with a transparent and complete view of spend across indirect spend categories. This will make it much easier to identify areas in need of immediate improvement, streamline your indirect spend categories while maintaining strategic redundancies, and select your preferred indirect suppliers based on their capabilities and performance record.

Using the insights revealed by your spend analysis, you can establish and implement best practices for category management. Following these practices is especially important in managing indirect spend, as the diversity and number of suppliers requires category managers to have both high expertise and the information they need to put it to proper use.

Armed with both a clear picture of your current spend and a plan for streamlining your indirect spend categories, you can develop and implement an indirect spend management plan as part of your overall spend management strategy. Metrics play a key role here, as they provide benchmarks for demonstrable improvements, value creation, and cost savings. They also help you establish a baseline for strategic sourcing and process improvements you’d like to make in the next iteration of your spend cycle.

Those same metrics can help you “slice and dice” your indirect spend management categories in important ways.

For example, categories where scalability and cost savings are the primary concerns might provide the greatest value if outsourced entirely.

On the other hand, business-critical processes with the potential to provide value in multiple dimensions (e.g., greater operational efficiency and agility, product innovation, improved compliance, etc.) if properly optimized may be better off sourced to a specialty vendor whose systems can be tightly integrated with your own.

3. Make Agility, Sustainability, and Resilience Your Watchwords

In an uncertain global economy, companies who invest the necessary resources in building agile, sustainable, and resilient supply chains are the ones best equipped to endure and overcome powerful (and in some cases, unprecedented) business disruptors.

Agility is as much a mindset as it is a strategy. As with digital transformation technologies, agility is more of a paradigm shift than it is a mere operational adjustment.

Collaborative, creative, and transparent, agile procurement teams focus on continuous improvement, proactive problem solving, and connecting value as directly to their workflows and processes as possible.

Agility improves supplier relationship management through communication and collaboration. And provides the flexibility required to pursue opportunities for growth and innovation with key partners while still providing the resources and contingencies required to protect business continuity.

Sustainability, too, is critical to better indirect spend management. Properly implemented, sustainable procurement practices generate hard value through reduced costs, potential opportunities for product innovation, and greater versatility in the face of disruption.

But they also generate soft value through reputational improvements, a smaller environmental footprint, and a larger market share with key demographics.

Finally, ensuring your indirect procurement prioritizes supply chain resilience will help keep the Internet connected and your break room coffee machine perking—as well as your website online, the lights on at your manufacturing facilities, and your remote teams collaborating across time zones and business units.

Resiliency in indirect procurement helps teams minimize their risk exposure and protect business continuity, and helps build the strong supplier relationships that can prove invaluable in a crisis.

Free the Value and Savings Hidden in Your Indirect Spend

Don’t starve your company of potential value with poorly managed indirect spend. Invest in data management tools and update your indirect spend management strategy to craft a supply chain that’s streamlined, agile, and resilient.

With a proactive and strategic approach, you can untangle your indirect spend supply chain and ensure every dollar spent in every category is generating an optimal ROI for your business—along with strategic insights and process improvements that provide lasting value and support for organizational goals.

Download PDF

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

Read our case studies, client success stories, and testimonials.
Visit our “Solutions” page to see the areas of your business we can help improve to see if we’re a good fit for each other.
Learn about us, and our long history of helping companies just like yours.

2. Download our guide “Indirect Spend Guide”

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

The post How to Manage Indirect Spend Categories appeared first on Planergy Software.

Indirect Procurement Process: Time to Modernize and Digitize

Rob Biedron — Wed, 24 Feb 2021 16:17:05 +0000

Download a free copy of "Indirect Spend Guide", to learn:

Where the best opportunities for savings are in indirect spend.
How to gain visibility and control of your indirect spend.
How to report and analyze indirect spend to identify savings opportunities.
How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Download Free Copy

Indirect Procurement Process: Time to Modernize and Digitize

Category

Spend Management

Written by Rob Biedron
24 min read

Tags

Digital Transformation Indirect Spend Procurement

Last edited

April 16, 2024

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KEY TAKEAWAYS

Due to the prevalence of digital businesses and the service economy, there is a major shift in focus towards managing indirect spend better.
Indirect spend can accounting for 25% or more of a company’s entire procurement spend.
Managing and optimizing indirect spend using digitization and automation offers significant cost-effective benefits of 10 to 25%.
The future of indirect procurement will blend direct spend strategies with new technology.

A strong procurement function is a key requirement for business success. Organizations need robust processes and strategic relationships with goods and service providers to bring about optimal growth, profitability, and seamless business operations.

While many organizations have focused primarily on direct procurement (or direct spend) – acquiring goods, services, and any essential supplies or raw materials used to create a final product – indirect procurement has often been overlooked for optimization.

To harness the value hidden in indirect procurement, organizations need to reimagine their current processes.

By combining approaches traditionally only applied to direct spend, with change management, and advanced technologies, procurement professionals can integrate process optimization, strategic spend management, and better supply chain management into their indirect procurement workflows.

What Is Indirect Procurement?

Indirect procurement is focused on sourcing and purchasing products and services that support a business’s operations but are not directly impacting the core revenue creating activities of creating and delivering the product or service the business sells to it’s customers.

Direct procurement relates to the purchasing of products and services that are directly involved in creating the product or service you deliver to your customers.

The indirect/direct model historically was applied very easily to companies that manufacture physical items, whether that is a loaf of bread, a piece of medical equipment, or a building.

Classifying spend as direct or indirect has become increasingly less straightforward with the increasing importance of the service economy.

Indirect procurement (or indirect spend) involves optimizing the acquisition of products and services that support an organization’s day-to-day operations, but do not play an essential role in the creation of final products or services delivered to customers.

Indirect spend often accounts for 25% or more of a company’s entire procurement. Indirect procurement provides the foundation for “the business of doing business”.

Indirect Procurement Examples

Indirect spend may include:

IT services
SaaS subscriptions
Uniform supplies
Food and travel
Janitorial Services
Human Resources
Facilities management
Marketing and advertising
Utilities (water, electricity, etc.)
Office supplies and equipment (lighting, printers, etc.)
Maintenance, Repair, and Operations (MRO)
Outsourced professional services (security, accounting, etc.)

What Is The Difference Between Indirect and Direct Procurement?

The key difference between direct and indirect procurement is how the items being sourced will be used.

Direct procurement focusses on core supplies that will be used to deliver goods or services to your customers. Indirect procurement focusses on items that support your business functions but are not directly used in the goods or services you supply to generate revenue.

Historically, energies were focused on optimizing direct procurement with strategies like strategic sourcing. Indirect procurement was largely left unmanaged and covered by ad-hoc or decentralized processes.

Direct Procurement	Indirect Procurement
Relates to purchases impacting goods and services sold by the company	Relates to purchases supporting the daily operations of the company
Usually procured with a strategic sourcing approach	Usually procured on an ad-hoc basis
Usually purchased in large quantities with low frequency	Usually purchased in small quantities with high frequency
Ordered from a core group of preferred suppliers	Often ordered in one off purchases or from various suppliers
Focus on supplier relationship management	Focus on fulfilment of immediate needs
Eg. Goods for sale, raw food items for a restaurant	Eg. Office supplies, SaaS subscriptions

The Problem with Indirect Procurement Processes

Companies have often prioritized direct procurement in the procurement function, seeking to maximize efficiency, cost savings, and value when sourcing raw materials and essential services.

Indirect procurement has been left relatively unmanaged often with negative impact on service delivery and cost effectiveness.

In addition, despite the growing importance of digital transformation to competitive strength, many companies continue to rely on manual workflows and paper-based processes in procurement, and in particular for indirect procurement.

As a result, companies lose value in numerous ways due to:

Lack of Spend Transparency
Without full spend transparency and process-driven accountability, companies increase their risk exposure through higher rates of maverick spend, invoice fraud, and even theft.
Inefficiency and Human Error
Manual workflows are tedious, repetitive, and susceptible to human error, which then adds additional costs by requiring time-consuming investigation and correction.
They also increase overhead cost and reduce efficiency, since procurement and accounts payable professionals have to spend time and energy on relatively low-value tasks rather than supporting strategically valuable initiatives.
Unoptimized Sourcing and Poor Supplier Relationships
Too often, only direct materials vendors receive the time and attention required to build strong and strategic supplier relationships.
Indirect procurement teams, meanwhile, are instructed to focus solely on quick cost savings opportunities, and therefore miss out on greater value in strategically sourcing indirect goods and professional services.
No Clear Plan for Digital Transformation
Organizations mired in the paper-and-pencil past and traditional approaches that prioritize direct procurement alone may struggle to secure interest, let alone approval, in making the digital leap.
Such organizations need not only new tools, but a proactive plan for effecting cultural change to make modernization and digitization possible—and ensure everyone from the C-suite down is engaged, educated, and working toward the same goals.

By relegating indirect procurement to the back burner while continuing to rely on outdated processes and technology, companies are limiting their own growth, functionality, and bottom line.

The “Focus” Shift in Procurement

Every organization will require a mix of indirect and direct procurement strategies to function optimally. However, there has been a shift with indirect spend taking up a larger and larger percentage of business spend.

With many organizations operating digitally, selling as-a-Service software products and other intangibles, procurement teams are slowly shifting more focus to indirect spend.

Strategies used in direct procurement combined with modern technology can help businesses realize significant savings.

Indirect spend can account for 25% or more of a company’s entire procurement, with optimization cost savings of 10-25% can be realized.

The Benefits of Managing Indirect Procurement

With the increasing importance oo indirect procurement, it’s important for organizations to understand the benefits of properly managing and optimizing indirect spend – via digitization and automation. Here are some of the key benefits:

Cost Savings
Managing indirect spend can reduce product and service costs by 10-25%, according to McKinsey and Company.
Having access to data, organizations gain insights to partner with high-performing, cost-effective suppliers – enabling cost-effective ordering.
Spend Visibility
Given the stakeholders and processes involved with enabling procurement, transparency and being able to account for every cent is essential for making improvements, problem-solving, and acquiring a general understanding of fiscal health.
Further, these elements can improve overall efficiency, efficacy, and accuracy of an organization, specifically if the goal is to scale.
Track Purchases
A lot of time is wasted chasing up on purchases internally and with suppliers. If staff can be given the ability to track purchases through the process it can reduce time-consuming back and forth queries.
How much money is being spent? Who are the vendors being used? Which employees are making purchases?
Using an automated solution like Planergy, tracking indirect procurement with the same level of scrutiny used to track direct spend will increase accountability, and streamline purchase requests, approval workflows, and expense requests.
Data Centralization
Having accessible data in one location offers comprehensive visibility into an organization’s indirect spend with risk analytics, spend analytics, detailed audit trails, and budget insight at decision points.
Improved Cash Flow Management
Leveraging an automated procurement solution allows organizations to take control of their indirect spending by ensuring approvals and spending compliance, maintaining budgets, and eliminating rogue spend.

How To Effectively Manage Indirect Procurement

Typically involving several stakeholders, contracts to negotiate, and spend categories, indirect procurement can be a complex process to manage, regardless of industry.

However, by incorporating a few essential steps, companies can achieve a proactive indirect procurement process that reduces expenditures and saves time.

Here are some tips to better manage indirect procurement:

Improve Supplier Relationship Management
Effective supplier relationship management, open communication, and a friendly, collaborative approach are crucial in creating opportunities to partner with quality suppliers to ensure your requirements for compliance, efficiency, and spend management are met.
Leveraging long-term supplier relationships to get the best quality materials at the best price. Mutually beneficial supplier relationships can also be helpful in achieving effective contract management and category management.
Focus On Change Management
Education and ensuring you take everyone with you is key to the success of any large change in business operations and improving indirect procurement processes is no different. A change management plan can help ensure a smooth transition.
Refreshers on internal procurement controls, best practices, and the nature of indirect spend, along with informational seminars can help bring everyone onto the same page.
It is also a good idea to cultivate relationships and collaborate with stakeholders on activities related to indirect procurement. They will likely be well-versed in the nitty-gritty details because of their direct work in the field.
Obtaining their valuable insight will enable companies to solve problems and predict financial patterns quicker and more accurately.
Lastly, if you are implementing an E-procurement solution, be sure to train and educate staff ahead of any upgrades to allow staff to familiarize themselves with new procurement processes and their specific roles within them.
Encourage Responsible Spending
Maverick spending can cause hiccups and confusion within the procurement processes, increase risks of fraud and non-compliance, and negatively impact an organization’s bottom line.
But, it may be an opportunity to bring about awareness and raise questions – Why is this happening? Which spend categories are suffering the most from maverick spending? Who are the mavericks?
Further, through strategic dialogue, it is essential to educate stakeholders and staff members on the need to adhere to procurement procedures and implement the necessary framework to guide their purchasing decisions.
Invest in Digital Transformation
Optimizing and digitizing internal processes for indirect procurement will save considerable time and introduce much needed procurement agility.
To gain true visibility, transparency, and control over indirect spend, companies should invest in spend management software, such as Planergy. This will help eliminate time-consuming manual processes that are prone to human errors.
Digital procurement will allow procurement teams to:
- Streamline workflows
- Improve category management
- Build customized reports to assist in forecasting and budgeting
- Gain real-time, company-wide visibility on all procurement activities and the business units they support
With accessible insights and data, and a transparent indirect procurement process, companies can drive organizational change, while gaining insights to collaborate with high-performing, cost-effective suppliers.
This gives way to the consolidation of purchase orders and bulk purchases to yield improved financial value for the overall organization.
Leverage Spend Analytics Insights
With better spend visibility and reporting it becomes possible to identify opportunities for savings through measures like supplier consolidation, contract negotiation, and smarter buying to leverage quantity discounts.
Risk Management
With centralized data you can also manage risk much more effectively. Problems in how you deliver your goods or services can impact your reputation just as much as the quality of the goods and services themselves.
Minimizing or eliminating risk exposure in your indirect procurement can help ensure business processes remain optimized.
This can also focus on compliance with ESG strategies. Ethical practices extend to your indirect procurement suppliers. If these are not managed correctly this could impact on customer satisfaction.

The Future of Indirect Procurement: Blending Basics with Next-Gen Tech

Representing over a quarter of a company’s entire procurement, indirect procurement is about much more than office supplies; maintenance, repairs, and operations (MRO); or janitorial services.

Yet, it remains an afterthought in most organizations, which is both unfortunate and costly – research from McKinsey and Company found indirect procurement optimization can reduce organizational costs by 15 to 17 percentage points.

Today, effective indirect procurement management is increasingly focused on three core concepts:

Applied Procurement Fundamentals
Procurement, centered around obtaining and purchasing goods and services, involves several interconnected processes. To remain competitive, financially healthy, and ensure business continuity, companies must follow best practices for these processes.
Procure-to-Pay Optimization
Optimization that includes both indirect and direct spend, and is executed using digital tools:
- Provides guided purchasing, informed by strategic spending and category management policies, ensuring full visibility and accountability, while decreasing the risk of fraud and maverick spend.
- Supports business continuity and long-term supply chain resilience through data-driven supplier management for indirect spend categories using key performance indicators (KPIs) and analytics.
- Improves cash flow through full spend transparency, and more strategic and robust supplier relationships; AP can capture more early payment discounts, leverage economies of scale, or preserve capital as needed.
- Allows indirect procurement teams to use and benefit from the same supplier and category management tools and strategies as direct procurement.
Effective Category Management
Category management can be a major companion to indirect spend management. Expertise and stronger engagement with suppliers, combined with granular indirect spend data, allows procurement teams to secure optimal pricing and terms, streamline supply chain efforts, and develop contingencies as needed.
Additionally, granular data provides valuable analytical insights that can be used to adjust forecasts, identify opportunities to further improve workflows, or decide whether to outsource essential support services such as information technology (IT) or maintain them in-house.
Strategic Use of Metrics
Data is crucial to improving both indirect and direct procurement. Measuring performance and compliance, along with tracking and evaluating KPIs with concise data, procurement teams can easily streamline supply chain by replacing non-mutually beneficial supplier relationships with more ambitious ones.
Zero-Based Budgeting (ZBB)
ZBB requires justification of every dollar spent. It works best when budgets are set by using rich data streams, the expertise of indirect spend category managers, and a shared commitment to supporting financial, departmental, and/or project goals.
Prioritizing Agility and Resilience
Focusing on creating agile and resilient procurement in your organization can also be a powerful tool in modernizing your indirect procurement (and procurement in general). Agility uses cross-functional collaboration to bring together skilled experts from multiple business units, disciplines, and backgrounds.
These teams apply their expertise and skills to manage categories proactively and flexibly, based on insights gleaned from data analytics, performance metrics, and financial strategies.
This allows them to manage indirect spend from a much broader perspective in real time so they can take advantage of cost savings opportunities or secure value by lowering total cost of ownership through strategic partnerships for indirect goods used across multiple departments and budgets.
Applied Digital Technologies
Companies that invest in and implement digital procurement solutions such as Planergy can enhance their workflows with automation, AI, and analytics to support optimization of existing procurement processes, and integrate new procurement strategies necessary to modernize and digitize indirect spend.
Automation
Automation provides powerful and immediate benefits in optimizing indirect procurement and the entire P2P process. Software bots require minimal oversight, eliminate human error, and have the ability to integrate rules and policies set by procurement and finance teams to automatically ensure spend remains within budgetary parameters.
Advanced Analytics and Centralized Data Management
Combined with integrating procurement with your existing software environment provides improvements like:
- Fully transparent connections between budget planning and actual spend.
- Elimination of data silos and file format conflicts.
- Provide support for advanced analytics tools that project demand, suggest supply chain consolidations, and provide insights, allowing procurement teams to seize unique opportunities such as cross-category purchasing initiatives.
Artificial Intelligence
Artificial intelligence is essential to digitization, can be trained, over time, to evaluate its own efficiency and efficacy, integrating continuous improvement into all workflows. AI can be as basic or as advanced to meet an organization’s specific needs.
Further, advanced AI also drives analytics and advanced purchasing processes.
Combining indirect spend data, the Internet of Things (IoT), and automatic replenishment tools, today’s procurement teams can rely on software to automatically track inventory and automatically move inventory to fill needs or place orders for new items – complete with context-aware contingencies that route requests falling outside the budget to a human approver for review.

Reap the Benefits of Digitizing Indirect Spend Processes

While managing indirect procurement can be a challenge for companies of all sizes, it is critical to an organization’s overall success and their bottom line.

However, lack of visibility and transparency, maverick spending, inefficient processes, human errors, and poor supplier relationships can lead to significant waste, missed cost savings and value improvement opportunities.

Proactive organizations and procurement teams can eliminate these challenges by implementing eProcurement technologies, such as Planergy, and combining them with clear procurement goals and a strategic approach to procurement fundamentals. In turn, improving overall processes, productivity, and profitability.

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Visit our Procurement Solutions page to see how Planergy can digitize and automate your procurement processes saving you time and money.
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2. Download our “Indirect Spend Guide”

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Indirect Procurement Strategy: Modernize to Generate Value

Keith Murphy — Fri, 04 Dec 2020 17:14:59 +0000

Download a free copy of "Indirect Spend Guide", to learn:

Where the best opportunities for savings are in indirect spend.
How to gain visibility and control of your indirect spend.
How to report and analyze indirect spend to identify savings opportunities.
How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Download Free Copy

Indirect Procurement Strategy: Modernize to Generate Value

Category

Spend Management

Written by Keith Murphy
16 min read

Tags

Indirect Spend Procurement Strategy & Planning

Last edited

May 9, 2024

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As traditional paradigms for procurement fall to the wayside in favor of data-driven models focused on value generation and continuous improvement, embracing digital transformation has become an essential tactic.

And for procurement professionals who are looking to begin or enhance the process of centering procurement as a value center, one of the most effective applications of digital technologies is optimizing indirect procurement.

To be effective, revamping your indirect procurement strategy requires a blend of powerful digital tools, process optimization, and investment in change management. Fortunately, your procurement team can put all three to work with the right techniques and a proactive approach.

Why You Need a New Indirect Procurement Strategy

Historically, indirect procurement has been more difficult to optimize than its direct counterpart.

The latter received the lion’s share of attention and resources because it dealt with production materials, components, finished goods, and production-related services, and consequently had a much larger perceived impact on essential business processes and the overall profitability and performance of an organization.

In addition, indirect spend was often opaque, plagued by inefficient and needlessly complex category management, and a poorly optimized supply chain, especially compared to direct spend.

This led to the widespread use of an indirect spend management model largely focused on capturing savings through price-based sourcing and implementing “damage control” by eliminating waste and redundancies when possible.

Procurement has, in turn, long been viewed as a cost management center at best within many businesses, and at worst a necessary evil that contributed little to a healthy bottom line.

Yet, with digital disruption bringing new tools, technologies, and techniques into play, it has become clear that indirect procurement—which can account for between 25% and 40% of a company’s total spend—can be, with the right approach, a rich source of both savings and value creation.

Indirect procurement is now about much more than office supplies or maintenance, repairs, and operations (MRO) costs; it’s the bedrock of professional services and goods that enable your organization to engage in “the business of doing business.”

Today, companies are pivoting to a data-informed, value-based approach to indirect spend management in order to compete effectively. This approach is built around three core concepts:

Software tools designed to ease the application of emerging digital transformation technologies, including automation, deep data analytics, artificial intelligence, and centralized, cloud-based data management.
Best-in-class practices for overall business process management, category management, supply chain management, and supplier relationship management.
Leveraging digital transformation to shift the role of procurement away from cost savings only and toward the creation of value and savings through both cost avoidance and cost management.

It’s worth noting that while each of these components is individually important to a successful indirect procurement strategy, they must be used strategically and in concert in order to achieve optimal results.

And it clearly pays to do so. A 2017 study by McKinsey & Company found retailers with best-in-class indirect procurement teams averaged 2% – 3% in annual cost savings, cut costs for each full time employee (FTE) in procurement by $1.3 – $1.5 million, and generated a return on investment (ROI) of between 12:1 and 15:1 on their indirect procurement dollar.

Today’s businesses are pivoting to a data-informed, value-based approach to indirect spend management in order to compete effectively.

Revitalizing and Optimizing Indirect Procurement

Applying the three-fold, integrated approach when crafting your indirect procurement management requires a deep and nuanced understanding of your supply chain and supplier relationships, your company’s goals for competitiveness and profitability, and the practices and tools required to streamline your processes for optimal performance and ROI.

Digital Software Tools

When you’re tracking transactions in order to calculate your total indirect costs, these tools provide accurate, complete, and transparent spend data.

They also support spend analysis used to harvest actionable insights—and the evaluation of your processes through the use of key performance indicators (KPIs) and other metrics to support continuous improvement across your entire procurement function and beyond.

The most important tool in your indirect procurement kit is a comprehensive procurement and AP automation solution.

Best-in-class options such as Planergy:

Centralize and consolidate your existing software environment.
Integrate with your existing accounting system, enterprise resource planning system (ERP system), marketing software, etc. while allowing for the integration of a variety of other discrete data sources.
- Integration also supports elimination of redundant systems and provides standardization of data formats to ensure role-appropriate data is fully accessible by all internal stakeholders.
- Templates and automatic data population further improve accuracy, speed, and consistency while minimizing the need for human intervention.
Provides intuitive and accessible tools for radically improved, data-driven category management, spend management, supply chain management, and supplier relationship management.
- Automated workflows can be fully customized with context-sensitive contingencies to eliminate roadblocks, delays, and errors.
- Data analysis provides actionable insights procurement professionals can use to negotiate better pricing and terms, form strategic partnerships with preferred suppliers, and streamline the supply chain while still providing adequate risk reduction and ensuring business continuity in the face of powerful supply chain disruptions such as COVID-19 pandemic.
Provide automation, analysis, and artificial intelligence that directly support continuous improvement, process optimization, change management, and the eventual implementation of digital transformation enhancements across your entire organization.

Other digital tools, such as physical objects integrated into your procurement workflows via the Internet of Things (IoT), digital twins, etc. can be added to provide an even richer datasphere and allow the machine learning algorithms to further refine their performance in pursuit of value creation.

Embracing digital transformation also makes it easier to integrate supplier systems with your own.

In addition to internal controls via guided buying, category management, etc., best-in-class organizations provide vendor portals to provide a direct source of always up-to-date vendor data, including punch-out catalogs.

Best Practices and Process Optimization

Having the tools you need is only the beginning. The procurement function also needs to establish, follow, and enforce best practices to ensure everyone in the organization understands not only the need for these changes, but how their actions contribute to generating value and savings for the company.

Zero-based budgeting—in which every dollar spent must be justified every year or financial period—ensures tight control over spend. Integration with a comprehensive procurement software solution makes it easy to capture and analyze spend data, along with data from other sources connected to the main system, to create accurate, context-aware, and strategically valuable forecasts and budgets.
A fully automated procure-to-pay (P2P) process—again, supported by a comprehensive purchasing solution—eliminates many of the most common pain points associated with spend management.
- Automation of high-volume, tedious, and low-value tasks improves speed and accuracy while eliminating human error and freeing staff to apply their time and talents to more strategic tasks, such as supplier relationship management.
- Guided buying and advanced category management ensure maverick spend and invoice fraud—two of the most egregious sources of waste, risk, and lost value in indirect expenditures—are also greatly reduced or eliminated.
- Automatic three-way matching further speeds processing time, improving accounts payable workflows and providing greater versatility for payment and cash flow management.
- Artificial intelligence in general (and machine learning in particular) via robotic process automation allow for iterative, self-guided continuous improvement to capture more savings and value.
- Data can be used to set and track KPIs to monitor and improve everything from supplier performance and contract compliance to detailed spend performance by individual projects, spend categories, or business units.
- Data is available for analysis and manipulation in real time, with role-appropriate, mobile-friendly access from a variety of platforms and devices.
Integration of procurement with finance is especially valuable when supplier systems are also integrated with the primary procurement solution. Both spend and performance data can be readily tracked and analyzed from internal and external sources, and then contextualized further through the lens of industry and market intelligence to develop strategic spending and sourcing initiatives.
Auditing is also improved, since data is automatically cross-checked and all transactions are automatically captured and made available to both procurement and accounting. Cross-functional analysis can reveal hitherto concealed opportunities to more effectively manage cash flow, develop new products with key suppliers, or expand the role of a preferred supplier with new materials, components, or services.
Finally, by directly connecting procurement to finance, senior management has clear and immediate access to data analytics and dashboards that demonstrate cost savings as well as value creation through process improvement, competitive advantage through partnerships and shared initiatives, etc.
Proactive change management is crucial to securing full buy-in at all levels of your organization. Shifting procurement in general and, more specifically, indirect procurement strategy in particular, as value creation tools for your company begins with education and training.
When developing your indirect spend management strategies, be prepared to demonstrate measurable value for the C-Suite. Securing top-level buy-in helps set the stage for company-wide adoption—the chief financial officer (CFO), for example, will prove invaluable in securing and implementing a P2P system and associated integration of procurement and finance. Provide educational materials directly establishing a connection between new systems and processes and improved competitive performance, greater cost savings, or a stronger bottom line.
It will be helpful to identify and train cheerleaders and champions for the new system and workflows, and allow them to provide advice and guidance to staff across the rest of the company.
Also, choose a software supplier who understands the need for change management, and invest in training before, during, and after the implementation of new processes and tools to make sure everyone understands:
- Their role in the hierarchy.
- What tools are available and how to use them.
- Compliance requirements for internal controls.
- The ways in which improving indirect spend management will help improve other business-critical processes (including direct procurement) and aid the company in reaching its goals for competitiveness, profits, and innovation.

Tame Indirect Spend to Generate Lasting Value

Say goodbye to rock-bottom pricing and scattered sourcing.

Leading procurement professionals know that an effective indirect procurement strategy represents a substantial opportunity to harvest insights, implement cost reductions, and generate value that meets or even exceeds the expectations set by internal stakeholders.

Invest in eProcurement tools, prioritize continuous improvement of procurement processes and take a proactive approach to supplier relationship management and spend category management.

By doing so, your procurement team will achieve indirect spend management that’s fully transparent, well-organized, and generating both soft and hard value for your organization.

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What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

Read our case studies, client success stories, and testimonials.
Visit our “Solutions” page to see the areas of your business we can help improve to see if we’re a good fit for each other.
Learn about us, and our long history of helping companies just like yours.

2. Download our guide “Indirect Spend Guide”

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

The post Indirect Procurement Strategy: Modernize to Generate Value appeared first on Planergy Software.

Overhead Rates Formula: What Is It and How to Calculate It

Keith Murphy — Wed, 21 Oct 2020 15:20:56 +0000

Download a free copy of "Indirect Spend Guide", to learn:

Where the best opportunities for savings are in indirect spend.
How to gain visibility and control of your indirect spend.
How to report and analyze indirect spend to identify savings opportunities.
How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Download Free Copy

Overhead Rates Formula: What Is It and How to Calculate It

Category

Spend Management

Written by Keith Murphy
14 min read

Tags

Indirect Spend Procurement

Last edited

April 18, 2024

Download PDF

Whether you’re operating a major corporation or running a local small business, managing the costs that come with doing business requires a thorough understanding of both direct and indirect spending.

When properly managed, overhead costs—those business expenses related to support for production rather than raw materials, direct labor costs, etc.—provide businesses of all sizes with a rich opportunity to improve profitability and set competitive pricing through optimization.

But in order to optimize your overhead costs, you need to know how to use the overhead rate formula to calculate the predetermined overhead rate.

This simple formula is the key to unlocking the insights that will help you take control of your indirect costs and ensuring every dollar spent provides maximum value and return on investment (ROI).

What is a Predetermined Overhead Rate?

Like other important financial calculations, the predetermined overhead rate (often simply referred to as the overhead rate or the overhead allocation rate) is straightforward in execution but requires careful, considered interpretation in order to provide maximum value.

Along with its complement, direct costs, your company’s overhead rate can have a profound effect on both your income statement and balance sheet, as well as your ability to make strategic sourcing and financial planning decisions.

Organizations rely on overhead rate calculations so they can set prices to protect profitability, budget manufacturing overhead costs, and keep an eye on the costs that come with “the business of doing business.”

You can calculate your overhead rate by adding up the total overhead costs for a given accounting period and then allocating those costs based on one of several allocation measures (also called activity drivers or activity cost drivers) that contextualize the amounts spent in different ways.

The general formula is:

Indirect Costs ÷ Allocation Measure = Predetermined Overhead Rate

Note: The predetermined overhead rate is generally expressed in currency values, but can be converted to a percentage value by multiplying by 100.

Whether you’re a small business owner or part of a large procurement and financial analysis

team at a large corporation, using this formula effectively can help you measure and refine your indirect spend.

Generally speaking, small businesses calculate their overhead rate annually, although they can and do use shorter periods, depending on the allocation measure they’re using.

Larger businesses centered on manufacturing often have additional, and much larger, indirect expenses to consider, however, and so more often choose to calculate their overhead rate quarterly or even monthly.

With more frequent overhead rate calculations, companies can make necessary adjustments in time to prevent indirect costs from having potentially costly negative impacts on profit margin, planning, and product pricing.

A Note on the Limitations of the Predetermined Overhead Rate Formula

It is absolutely an invaluable tool for businesses of all types and sizes, but the values reached using the predetermined overhead rate calculation formula come with a bit of their own risk.

Because the predetermined overhead rate is based on estimates, calculating it with incomplete or inaccurate data can also skew the budgets, reports, and forecasts created using it.

In addition, without the proper analytical tools, it’s possible to rely too heavily on historical data that may not apply to current operating conditions and costs.

A difference between estimated and actual costs creates a variance charged to the cost of goods sold. This can have a significant impact on profits and future pricing.

Fortunately, these risks can be handily managed with the use of modern digital tools.

Along with its complement, direct costs, your company’s overhead rate can have a profound effect on both your income statement and balance sheet, as well as your ability to make strategic sourcing and financial planning decisions…

Direct Costs, Indirect Costs, and Overhead Rate

Before you can use the overhead rate formula to start streamlining your overhead expenses, it helps to have a firm grasp of the values and terms involved.

Direct Costs are any costs with a direct connection to producing the products and services your company sells. Direct expenses include:

Direct labor
Direct materials (raw materials)
Physical assets
Manufacturing supplies

Indirect Costs are those incurred through normal, everyday business operations. They have no direct connection to production costs, but are instrumental in calculating the predetermined overhead rate. Examples include:

Quality assurance
Office and facility rent
Utilities (e.g. gas, water, electricity)
Marketing services
Indirect labor
Taxes
Maintenance costs
Legal services
Information technology services
Non-production equipment
Indirect materials (e.g., office supplies)
Insurance

Fixed costs are those expenses unaffected by changes in production levels. One of the most common examples is rent, which remains static no matter how many goods are produced.

Variable costs rise and fall with production. Raw materials and direct labor are both variable costs. On the indirect side, utilities are often a variable cost because more production means more resources and energy consumed.

Overhead Rate Calculation Examples

Once you’ve identified and calculated your total indirect expenses, it’s time to choose an overhead allocation method so you can properly contextualize the results and make the right strategic decisions.

Some of the most commonly used include total sales, the number of direct labor hours, the cost of direct labor, and total machine hours.

Using an example business called Bob’s Quality Widgets, let’s take a look at four methods of predetermined overhead rate calculation using each of these allocation measures.

Sales

The business owner, Bob, wants to create and refine his monthly budget. Accordingly, he applies his indirect costs for the month of June ($200,000) to his total sales for the same period ($800,000).

$200,000 ÷ $800,000 = $0.25

Based on this result, Bob’s spending $0.25 on overhead for every dollar he earns in sales.

Applying the percentage conversion, we see Bob’s total overhead costs with regard to sales are 25%.

Direct Labor Hours

To achieve continuous improvement and optimize production workflows, it’s important to identify those processes whose costs reveal inefficiencies robbing your coffers.

In comparing the total direct labor hours for June (10,000) to the total indirect costs, Bob sees:

$200,000 ÷ 15,000 = $13.33

Bob’s incurring $13.33 in indirect costs for every hour of direct labor.

Cost of Direct Labor

A variable cost and an integral part of your company’s cost of goods sold, direct labor is the total salaries and wages paid at an hourly rate to production employees.

Assume Bob has $225,000 in direct labor costs for June. Plugging that into our overhead rate formula, we get:

$200,000 ÷ $225,000 = $0.89

For every dollar paid to his production employees, Bob is spending $0.89 in overhead.

Converting this to a percentage, Bob has a manufacturing overhead rate of 89% with regard to direct labor costs.

Total Machine Hours

This allocation method is similar to Direct Labor Hours, except it uses the total number of hours production machinery is in use, rather than direct labor hours of all kinds.

Bob’s machines churned out widgets for 10,000 hours in June. When he plugs this into the formula, he gets:

$200,000 ÷ 10,000 = $20

Bob’s manufacturing overhead rate for machine hours is $20; he’s spending $20 in indirect costs for every hour his machines are in use.

By carefully considering these estimated costs when setting his budgets and product pricing, Bob can be sure he’s earning enough profit to cover indirect costs while still generating adequate revenue for other business goals.

How to Reduce Your Predetermined Overhead Rate

The lower the overhead rate, the higher your profits and the more efficient your processes.

Once you’re comfortable calculating and applying your predetermined overhead rate, the next step is finding ways to slash indirect costs to improve it.

One of the most effective ways to begin is by implementing a procurement software solution such as Planergy.

In addition to centralizing your data management and providing a complete, clear, and accurate picture of all both current and (over time) historic spend for both direct and indirect costs, procurement software:

Reduces indirect expenses in several important areas by eliminating the need for paper-based workflows.
Provides continuous improvement and process optimization through automation.
Gives stakeholders at all levels role-appropriate access to information in real time.
Allows leadership to calculate important financial benchmarks (such as overhead rates) and use that data for more accurate, timely, and strategically valuable decision making.
Mitigates the risks accompanying predetermined overhead rate calculations by:
- Providing the most accurate and complete data possible.
- Simplifying historical data analysis to identify divergence from past trends and make more accurate estimates.
- Tracking and recording variances to further refine estimates for future overhead rate calculations.
Gives your procurement team access to supplier relationship management and supply chain optimization This makes it easier to obtain both direct and indirect goods and services at better quality, pricing and terms, simultaneously improving product quality while reducing product cost.

Equipped with these software tools, you can also more effectively perform needs analysis to further reduce overhead.

For example, improvements in production efficiency or new sources for raw materials may allow you to consolidate manufacturing facilities, reducing factory overhead.

Switching to remote working part or even all of the time for your office staff can eliminate the need for large physical office space, and virtualizing teams can provide opportunities to reduce human resources costs through a strategic combination of employees and contractors.

A Simple Calculation with Big Impact on Business Success

Don’t let indirect costs hamper your profitability.

Taking the time to calculate your overhead rate accurately will help you identify which parts of your spend are working and which need improvement—and lower overhead for more effective pricing, greater efficiency, and a healthier bottom line.

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5 Steps To Improve Indirect Spend Management

Rob Biedron — Mon, 24 Aug 2020 15:49:37 +0000

Download a free copy of "Indirect Spend Guide", to learn:

Where the best opportunities for savings are in indirect spend.
How to gain visibility and control of your indirect spend.
How to report and analyze indirect spend to identify savings opportunities.
How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

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5 Steps To Improve Indirect Spend Management

Category

Spend Management

Written by Rob Biedron
15 min read

Tags

Best Practices & Tips Indirect Spend Procurement

Last edited

April 15, 2024

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Procurement teams of all sizes know that managing both direct and indirect spend are important parts of keeping costs low, generating value, and supporting the profitability and competitive strength of their organizations.

In generations past, spend management has focused largely on optimizing direct spend management, as it is tied directly to raw materials, components, finished goods, and services necessary for production.

Yet managing indirect spend—tied to the costs of “the business of doing business”—presents rich opportunities of its own, provided your procurement organization has the tools, talent, and techniques required.

Modern procurement processes harness the power of digital technologies to overcome the hurdles traditionally associated with indirect spend management, including lack of transparency, inconsistent compliance with internal controls, and poor data management.

By familiarizing yourself with these technologies and developing a formal strategy for indirect procurement and spend management, you’ll be able to take advantage of new opportunities for greater profits, performance, and savings—not just in procurement, but across business units and your organization as a whole.

Common Challenges in Indirect Spend Management

While it’s easy enough to draw a connecting line between a company’s spend on direct materials and its overall productivity and profitability, indirect procurement requires a more nuanced and strategic approach to be properly appreciated (and managed!).

Indirect spend includes everything that supports everyday business operations outside of production of the goods your company offers its customers, and may account for between 25% and 40% of your company’s total spend.

Depending on the nature and size of your business, indirect expenditures can include:

Office Supplies
Facilities
Utilities and Related Expenses (including maintenance)
Technological Infrastructure (software and computer hardware, telephony, etc.)
Marketing
Human Resources
Travel, Conference, and Remote Team Member Expenses
Outsourced Services (security, Information Technology (IT) services, external accounting firms, etc.)

The average company often finds itself with a convoluted set of indirect spend categories, a needlessly complex supply chain, and a lack of full transparency into their indirect spend.

Given the rather sizable dollar value attached to indirect spend, this can have far-reaching consequences throughout the procurement function and the parent organization.

Often, procurement teams operate at substandard efficiency, and struggle to realize both value and savings opportunities due to:

Lack of spend visibility.
Lack of employee education about why indirect spend must be managed.
Lack of buy-in to, and compliance with, internal controls and metrics for tracking and optimizing indirect spend.
Rogue spend (also called maverick spend or tail spend) taking place through unauthorized or suboptimal vendors, increasing the risk of invoice fraud and reducing the accuracy of planning and reporting data, as well as the company’s ability to manage cash flow effectively.
Insufficient or unorganized category management, making it harder for internal stakeholders to connect with key suppliers and develop the strong and collaborative relationships required to secure the best possible terms and pricing, take advantage of opportunities for innovation, etc.

“Off-the-shelf may be fine for jeans or frozen pizza. But when it comes to procurement, a system built from the ground up to meet your company’s current and future needs for spend management and strategic sourcing is essential to managing indirect spend in the age of digital transformation.”

Greater Success Through Indirect Spend Management: Three Examples

By developing clear and consistent indirect spend management processes and leveraging both technology and data analysis, procurement professionals at many large global corporations have found ways to tame the indirect spend tiger.

Let’s take a closer look at three of the most successful:

1. Amazon Business

It would be difficult, if not impossible, to discuss the optimization of indirect spending without mentioning Jeff Bezos’ multi-trillion-dollar eCommerce and cloud computing behemoth.

Spanning the globe with millions of products, and a supply chain to match, Amazon Business manages indirect spend through bleeding-edge process optimization and automation that reduces both maverick spend and invoice fraud.

One of the most effective tools Amazon uses is the direct integration of its software and systems with those of its vendors and resellers.

The company’s business-to-consumer (B2C) platform serves as a direct conduit between suppliers, resellers, and end users; as a result, Amazon can set and enforce rules that provide maximum transparency, savings, and value through optimal terms, strict supplier performance and compliance metrics (i.e., key performance indicators (KPIs)).

In addition, Amazon also uses strategic, resilient, and flexible supply chain management supported by data analysis, automation, and collaborative, contextual supplier relationship management.

This model has provided tactical and strategic procurement insights the company uses for more strategic sourcing and decision making.

Using supplier and customer data, it can identify products and services it can produce itself more cheaply and profitably than those offered by third parties, and shift their offerings accordingly.

From mega retailers like FitBit and Roku to logistics and cloud computing services, Amazon has made itself indispensable to the success of others, and in doing so has gained extensive control over the most common indirect spend management issues.

2. Starbucks

Along with billions of cups of hot coffee sold to the public each year, cafe giant Starbucks produces savings and value for its investors through innovative and proactive indirect spend management.

Since 2008, the company has pursued more effective spend management by streamlining workflows through process optimization and automation and bringing its globe-spanning and diverse supply chain under a single logistics system for supplier management.

It’s also developed, refined, and tracked myriad KPIs for suppliers, service, safety, and savings to ensure it’s getting the biggest bang for its buck in value, cost reductions, and profits.

The result? More than half a billion dollars in savings thanks to a unified, resilient, and agile supply chain prioritizing effective indirect spend management.

3. Hewlett-Packard

When it comes to securing maximum value with minimal hassle from indirect procurement, you might say Hewlett Packard wrote the book—or at least, a set of standardized rules designed to help companies gain insight into and control over their indirect procurement.

Drawing on the expertise earned through managing its own diverse and complex global supply chain and serving both corporate and consumer markets, the company created the COPC standard in partnership with Stryker, Magna, Cisco, ADP, and Harley Davidson, as well as Western Michigan University.

Hewlett-Packard invests heavily in procurement optimization in general and in indirect spend management in particular, using advanced data management and analysis tools to pursue innovative savings and value opportunities such as its Buy/Sell program and an advanced bill of materials analysis program that lets the company take advantage of savings opportunities in real time.

Better Indirect Spend Management in Five Simple Steps

You can emulate the indirect spend management success of global corporations by following a few basic best practices and implementing the right technological solution.

Perform a detailed spend analysis. Knowing what you’re spending and with whom is the first step to identifying key suppliers, targeting savings opportunities, and reducing risk and expense that come with non-compliant or underperforming vendors.

Streamline indirect spend categories. A tidy supply chain isn’t just easier to manage; consolidating indirect spend categories helps you secure cost savings and strengthen supplier relationships. Leveraging economies of scale, securing better contract terms and pricing, and developing mutually beneficial partnerships is much simpler when your team is focusing their efforts on managing a streamlined set of categories.

Invest in education and training. It can be tough to overcome traditional attitudes toward indirect spend—and even tougher to secure total buy-in for internal controls like guided buying, absolute contract compliance, and the need to actively combat maverick spend and invoice fraud. Investing in dedicated training for your team (from the C-Suite down), will help ensure everyone’s on the same page and supports your procurement team’s efforts to achieve savings and value through improved spend management.

Develop and implement a spend management plan supported by key performance indicators. In addition to education, make sure your team creates formal standards and processes for controlling and optimizing direct and indirect spend, along with the KPIs necessary to evaluate their effectiveness. Continuous improvement can only happen when you have a clear idea of how your practices and policies are affecting costs, profits, and risk management over time.

Invest in a purpose-built eProcurement solution. Off-the-shelf may be fine for jeans or frozen pizza. But when it comes to procurement, a system built from the ground up to meet your company’s current and future needs for spend management and strategic sourcing is essential to managing indirect spend in the age of digital transformation.

Working with an eProcurement provider like Planergy, you can build a software solution that provides immediate cost savings and demonstrable value through process automation.

You can kickstart your entire digital transformation strategy, or take a modular approach.

You might, for example, tackle indirect spend challenges with procure-to-pay (P2P) automation and optimization tools, including:

Cloud-based and comprehensive data collection, management, and analysis—including full visibility into all spend data.
Guided buying environments.
Optimized spend categories.
Collaborative and communicative supplier relationship management.
Supply chain optimization tools (including advanced contract management).
KPIs for monitoring and improving both internal controls and practices as well as vendor contract compliance and overall performance.
Real-time, role-appropriate access to all spend data for internal stakeholders.
Improved collaboration and communication between team members, management, and your vendors, minimizing risk of damaged relationships and lost savings.

Choosing a purpose-built solution will also give you the opportunity to collaborate with your provider to educate and train your staff to embrace your new workflows and procurement processes, and encourage the necessary corporate culture shift to secure compliance from the top down.

Manage Indirect Spend for a Direct Impact on Your Company’s Health

Indirect spend has moved from the shadows of procurement and into the limelight of value creation.

By investing in the right eProcurement software solution and making essential best practices for managing indirect spend part of your overall procurement strategy, you can eliminate the waste and inefficiencies that have plagued indirect spend for too long, and make your procurement function a source of larger cost savings, greater competitive strength, and a healthier bottom line.

Download PDF

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

Read our case studies, client success stories, and testimonials.
Visit our “Solutions” page to see the areas of your business we can help improve to see if we’re a good fit for each other.
Learn about us, and our long history of helping companies just like yours.

2. Download our guide “Indirect Spend Guide”

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

The post 5 Steps To Improve Indirect Spend Management appeared first on Planergy Software.

Indirect Spend Archives : Planergy Software

Discretionary Expenses: What Are They, Examples, and How To Control Them In Business

What's Planergy?

Cristian Maradiaga

King Ocean

Download a free copy of "Indirect Spend Guide", to learn:

Discretionary Expenses: What Are They, Examples, and How To Control Them In Business

KEY TAKEAWAYS

Discretionary Expenses in Personal Finance

Entertainment

Vacation

Hobbies

Essential Expenses

Examples of Essential Expenses

Rent or Mortgage Payments

Property Taxes

Homeowner’s Insurance

Utility Bills

Food Expenses

Travel Expenses

Health Insurance Premiums

Medication and Specialized Treatments

Minimum Payments on Credit Cards

Student Loans

Discretionary Expenses in Business

Employee Perks and Benefits

Office Decor and Aesthetics

Professional Development and Training Programs

Non-Essential Software Subscriptions

Business Travel and Entertainment Expenses

Donations and Sponsorships

Distinguishing Between Essential and Discretionary Expenses

Best Practices for Managing Discretionary Expenses

Create a Clear Budget

Regularly Review Spending

Negotiate with Suppliers

Encourage Employee Cost-Saving Efforts

Using Software to Manage Discretionary Expenses

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

2. Download our “Indirect Spend Guide”

3. Learn best practices for purchasing, finance, and more

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Cristian Maradiaga

King Ocean

Download a free copy of "Preparing Your AP Department For The Future", to learn:

Manufacturing Overhead Formula: What Is It And How To Calculate It

What is total manufacturing overhead?

Indirect materials

Indirect labor

Utilities

Depreciation

Associated financial costs

What are the steps to calculate the manufacturing overhead?

Calculate all indirect costs

Determine which allocation base to use

Find your base totals

Calculate overhead rate percentage

What is the difference between manufacturing overhead and total manufacturing cost?

What is the formula for total manufacturing cost?

Direct materials

Direct labor

Manufacturing overhead

How do you calculate manufacturing overhead from WIP?

How do you calculate manufacturing overhead from WIP when using the batch costing method?

Why is it important to calculate manufacturing overhead?

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

2. Download our guide “Preparing Your AP Department For The Future”

3. Learn best practices for purchasing, finance, and more

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What's Planergy?

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Download a free copy of "Indirect Spend Guide", to learn:

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