It's great when you can realize savings for your company. But how do you ensure that they positively influence the entire company result, and not just your own department's budget?
If there is no system to translate the realized savings into the budgets of the entire organization, there's a good chance you won't notice anything in the final result. Those savings are then often used to plug a hole somewhere else. That can be quite frustrating.
It's important to know that this entire process is not deliberately set up this way. It's just due to the way companies function. Management makes expenses based on their department's budget, while buyers calculate savings based on product categories, such as insurance, office supplies, and so on. Those categories usually overlap different departments within your company, sometimes even within a corporate group.
As long as budgets are respected, no alarm bells ring. Extra expenses that would normally exceed the budget and thus not be accepted, are now accepted. The reasoning is 'there's still budget left'. This is how those savings disappear through the cracks.
Fortunately, it can be different, namely with a closed loop process.
Closed Loop Process
Successful companies ensure that buyers, accountants, and management see and use the same figures. As soon as you realize a saving, the budgets are adjusted and you thus have an impact on the expenses of the entire company. The management of the company can then decide together where exactly the realized savings will be used.
How to Set Up a Closed Loop Process?
To begin with, ensure a process that captures all savings within your company by documenting each initiative from the start. This can be done with a detailed form with the intended expenses and their savings, and whether they were included in the budget or not. In periodic meetings with managers and the financial team, you can then valorize those savings.
You can also go a step further and set up a team for this with people from your financial team and buyers. That team then has the goal of validating savings and adjusting budgets as early as possible in the process. You can then put the realized savings in a separate budget and finance projects with it instead of just plugging a hole in your budget with each realized saving.
Adaptation
No one likes to see their budget reduced halfway through. Many professionals are used to saving on certain items to then spend that amount somewhere else within the same budget. It's therefore advisable to anticipate savings you want to realize and take them into account when drawing up budgets. This gives executives a good reason to work closely with your purchasing department.
Given the way most companies are structured, it's not surprising that purchasing savings disappear into thin air. Competent business leaders bridge the communication gap between purchasing, finance, and managers by setting up a closed loop system to track all savings and record them. The advantages speak for themselves: a more efficient company that enables itself to reinvest the profits from savings in strategically chosen projects.
Is such a closed loop system something for your organization? It's certainly something to think about. We are convinced of this approach and are happy to work as specialists to realize significant savings with an effect on the profit margin, also for your organization.