Particularly during difficult financial times, companies must keep a close eye on budgets to prevent cash from draining out. As the cost of doing business increases at an unprecedented rate, and as recessionary conditions expand globally, implementing an effective p-card program can help keep budgets in line.

Sensible spending and stemming the flow of outgoing cash are critical factors for businesses in even a healthy economy. Given today’s economic environment — with the credit crunch and the significant consumer spending slowdown — having cash on hand is vital for a company’s survival.

“Lending to cash-strapped business is going to be very low on [a bank's] agenda,” Neil Robertson, CEO of Vectra IT, recently said to Finance Director Europe (FDE). “For many mid-sized companies, it means they are financially on their own.”

To keep the company financially healthy, financial directors must take control of their company’s cash and ensure that the company is spending it wisely. Easier said than done, Robertson explains, saying thusly:

While finance directors remain accountable for the corporate spend, they have remained totally dependent on the diligence of the budget holding managers to control their spending and that those budget holders are dependent on the individuals that raise the orders. For most organisations, this remains a manual process that has numerous flaws.

According to FDE, the most obvious flaw is management’s inability to track spending, which leads to overspending and current committed expenditure encumbering future budgets. One approach financial directors can take to control their budgets and individual purchasers’ spending is by implementing a purchasing card (p-card) program.

Financial services firm JPMorgan’s May 2008 Auditing and Compliance Strategies for a Solid Purchasing Card Program report provides a guideline for companies looking to control their corporate expenditure. JPMorgan surveyed dozens of its p-card customers and compiled their best practices for building and maintaining a solid card program.

JPMorgan recommends 10 tips for monitoring p-card purchases for misuse, out-of-policy spending and fraud. Among them:

• Select an anti-fraud team. Make sure the team incorporates members from throughout the corporation so that all departments comply with the set procedures.
• Designate checks and balances. At the very least, cardholders should not be their own approving manager.
• Stick with regulations. All p-card holders should be held to the same rules and standards, lessening the potential to exploit loopholes.
• Implement protective measures. Such measures include spending limits and blocked merchant category codes.
• Enhance auditing practices. This can be done using various software that enable administrators to monitor card activity in real-time and block unauthorized buys.

Even before the current recessionary economy in which purchasing departments currently find themselves, JPMorgan determined that p-card best practices should also include these:

• Training early and often to ensure the cardholder knows his or her role and responsibilities;

• Adapting auditing practices to your business needs;

• Creating a comfortable environment for cardholders to report problems or ask questions;

• Conducting peer reviews; and

• Networking with other institutions and companies to learn about other programs.

“The biggest lesson learnt is that retaining corporate cash becomes king and the best way to do this is not to spend it,” Robertson writes at FDE. “That sounds simple enough, but in reality it is much harder to implement than you would think.”

Along with keeping a strict eye on spending, Purchasing Magazine‘s Commodities Council suggests that buyers keep a close watch on inventories, watch for deferred investments and buy on short cycles, to endure the credit crunch. Access individual interviews HERE.

Resources

Purchasing Card Auditing and Compliance Strategies (registration required)
JPMorgan, May 20, 2008

Surviving the Credit Crunch – Taking Control of the Company’s Cash
by Neil Robertson
Finance Director Europe, July 28, 2008

Tips for Buyers on Surviving the Credit Crunch
by Purchasing Staff
Purchasing Magazine, Oct. 14, 2008