In response to the economic uncertainty caused by the Covid-19 pandemic, 77% of finance executives surveyed last month by CFO Research said they were halting all discretionary spending to help manage cash flow.
Cutting discretionary spend is a typical tactic for CFOs and executives who need to take immediate action in the near term. It’s no wonder that organizations from Halliburton to Harvard have announced such cuts as part of a larger package of reforms that also include salary reductions, hiring freezes, and project reviews.
The challenge is that reducing discretionary spend is usually easier said than done. The issues start with identifying how much your company is spending today, and where.
What is discretionary spending?
Discretionary spending is a general term for a broad collection of individual line items and transactions that happen across multiple departments and cost centers—typically anything outside of fixed costs like payroll, rent, and cost-of-goods. (In the long run, of course, everything is either valuable or discretionary, but in the short term, some costs cannot be changed and are therefore fixed.) Examples of discretionary spend include things like travel, meals and entertainment, marketing and events, training, and research and development.
It’s discretionary because it involves some kind of choice, and it typically happens both at the employee level and the company level. While the individual purchase amounts within these categories may be small, they can add up—to 25% of your budget or more.
Why is tracking discretionary spending a challenge?
Discretionary spend is hard to see and monitor—and our research has found that the bigger the company, the harder it is to track. One challenge is the fact that sourcing and procurement has become more decentralized. Employees tend to drive many, if not most, of the purchase decisions—and this was even before the mass move to working remotely. Purchases are made online, paid for by card, and often are only visible to accounting when employees submit expense reports.
The challenge is exacerbated by traditional, batch-based expense reports, which lump together many different types of transactions for reimbursement. Traditional expense software cannot analyze the underlying data in enough detail to identify wasteful spend or duplicate software licenses, for example, leaving controllers and CFOs in the dark about easy places to trim spend and forcing them instead to deliver blunt directives about cutting “all unnecessary spending,” or reducing spending across the board by X%.
New Issues to Consider
Traditionally, the biggest expense in discretionary spending is travel. Since travel for the rest of 2020 will likely be limited to control the spread of Covid-19, it’s an easy category to target for cuts. Before you cut it back entirely, take a moment to consider the underlying purpose of travel.
As our corporate controller Brian said recently,
“Most of our travel investment is used to generate stronger customer relationships, and of course we still need to do that, so we are making investments to connect with our customers in other ways.”
You may want to reallocate some travel budget to upgrading your teleconferencing software, for example.
Software subscriptions are another large category to scrutinize, especially as many purchase decisions are made without explicit approval from the IT department. Analyzing your software spend can reveal duplicative subscriptions that could be consolidated for better pricing or unused seats that could be canceled. Newer software, such as Center Expense, can eliminate licensing fees altogether.
Blunt Tool vs. Surgical Cut
Across-the-board discretionary spend cuts sound like a good idea, but often deliver little in the way of results. Why? For starters, they lose sight of the big picture, which is to emerge from crisis mode ready to restart your business. If you hack all spending down to zero, you will miss opportunities to focus on important customer retention programs or invest in projects that bring a competitive advantage. You really need to understand the benefits received from each expenditure so you can make the right reduction choices.
Across-the-board discretionary spend cuts sound like a good idea, but often deliver little in the way of results.
The other issue with across-the-board directives is that they tend to come across as broad edicts rather than actionable tactics. Few companies know how much they normally spend on discretionary items and which of those items are truly essential, and few employees truly understand what action they need to take. More often than not, employees delay taking action at all, hoping their programs will be spared, and when the quarter ends, management is disappointed with the results.
Few companies know how much they normally spend on discretionary items and which of those items are truly essential, and few employees truly understand what action they need to take.
Ideally, your company can take a more surgical approach to discretionary cuts starting by identifying all spend that falls in the discretionary category, finding strategic line items to cut or maintain, and monitoring progress to goal. Granted, in emergency situations, it may be easiest to tell your team to freeze all spend temporarily, but as you work through the numbers, you can zoom out and re-evaluate which programs need to move forward.
A Balanced Approach to Scaling Back Discretionary Spend
- Start with the goal in mind. Your actions will be very different if you’re managing for near-term cash flow or if you’re trying to stretch your cash on hand to ride out the downturn.
- Communicate. Your co-workers look to the finance team for guidance about how to proceed during times of economic stress. You may not know all the answers, nor do you need to share all the worst-case scenarios, but you can help them understand the reasoning behind the actions you expect them to take, especially when cutting discretionary spend might alleviate the need for more drastic measures.
- Look for easy wins and identify essential needs. Duplicative software subscriptions, employee snacks, the leadership off-site retreat, travel budgets are all areas that can likely be removed from the budget. That said, if travel was primarily used for closing sales, consider reallocating some of that budget toward better telecommunications technology.
- Root out cases of spend inertia. Sometimes spending patterns continue even though the return on that investment is no longer there—spend just keeps happening because that’s what’s been done in the past. Ask whether your team is still getting value from long-term consulting projects and ongoing marketing programs. Look for instances where renegotiating terms with vendors might be beneficial.
- Enlist help from all employees. Ask them to identify non-essential programs, more cost-effective solutions, and other creative ideas for cutting spend. One CEO recently challenged his entire executive team to research solutions that could be implemented now to increase efficiency or reduce costs once business reopens.
- Update your policies. What can be purchased and expensed? Who needs to approve those purchases, and what types of things need advance approval. You may need to revisit your expense policies.
- Monitor employee spend daily or weekly, rather than monthly. Real-time expense software not only helps you see spend as it happens, but also flags out-of-policy purchases for immediate review. Companies that use traditional expense report software can’t see employee-driven purchases until employees submit expense reports, so ask for them to be submitted more frequently.
- Enforce spending limits as needed. As a last resort, you can reduce credit limits on or lock individual employee corporate cards and p-cards.
- Create a positive feedback loop. As you track expenses over time, regularly share progress with the rest of the company. Strengthen your fiscal culture by thanking employees for making tough decisions or sacrifices, enlisting their help if additional spend reductions are needed, and celebrating when targets are achieved.
Weathering the economic downturn will take discipline, agility, persistence and teamwork. Finance teams are on the front-line during this time period, pulling together the data, metrics, and models that will guide the company through uncertain times. When the rest of your colleagues understand what they need to do, they will throw their weight behind the effort to control costs and conserve cash for the long run.
HOW CENTER CAN HELP
Center’s real-time expense management software helps monitor discretionary spend, control costs, and track expenses. Center is easy to customize to your policies and adjust as needed—the AI-powered audit flags any expense requiring review. Managers, finance, and executives can see at a glance what’s been spent to date, without waiting for month-end close. With Center’s integrated corporate card, you’ll have the data and controls you need to make informed decisions about discretionary spend. To find out more, schedule a demo with our team.