What Is a Purchasing card for fast-growing companies?

ControlHub
January 25, 2023

These days, corporate purchasing has become cumbersome. Arguably, it’s one of the most complicated corporate processes in an age where everything is digital. Even with digital purchasing and quick purchase order issuance, the old system doesn’t work well when an employee needs to buy a small item. In other words, while traditional procurement provides a lot of accountability, it might not be necessary for management to directly approve every transaction.

Worse, the traditional methods of payment mean that a vendor can wait a long time to get paid for a ream of copy paper or a computer repair. Unfortunately, waiting for a long time to get paid isn’t pleasant for suppliers. Luckily, using a procurement card provides full accountability for all expenditures while letting vendors get paid immediately.

In the rest of this article, we’ll look at how a purchasing card program can help your business. This includes a comparison of different procurement methods and payment types. We’ll also show you how you can save money because you won’t have to waste employee time on approvals for the smallest procurement needs.

What is the P-card meaning, anyway?

A P-card is a business payment method that combines the convenience of a company card with the accountability of more traditional purchasing methods. Also called a purchase card, it’s a form of payment that gives your financial team full control over employee spending without micromanaging every small transaction.

Your company needs a purchasing card program

Let’s be honest: almost every company has employees who need to buy incidental items occasionally. In the past, the employee had three basic options. They could go through the entire process with requisitions and a purchase order, they could use a company credit card, or they might pay with their own credit card and file an expense report.

None of these options are optimal. It’s very expensive to issue a purchase order for small transactions. Furthermore, employees don’t like to spend their own money to pay the supplier and ask for a reimbursement. Even if they did, it’s expensive to process an invoice every time an employee needs to pay the supplier.

→ Click here if you want to dive deeper into the Prepaid Business Cards

A p card program provides accountability

With procurement cards, it’s different. You can issue these corporate purchasing cards to every employee that needs to purchase incidentals. Each P-card purchase is logged, so you can make sure each transaction matches an invoice. This way, if your employee needs to buy a roll of stamps or top off the postage meter, they can swipe the card, save the receipt, and walk away.

However, this isn’t to say that your managers get carte blanche to spend whatever they want. Instead, your chief financial officer or other executive can set spending limits or restrict where the card is used. If the employee tries to use the card somewhere besides approved vendors or goes over their spending limit, the p card purchase will be declined.

A Procurement card is different from other payment methods.

While there are several similar payment products, procurement cards are unique. As we’ve mentioned before, it isn’t a credit card, even though your supplier can’t tell the difference in terms of almost instant payment. However, the spending limits make these products unique.

We’ve already talked about how these procurement cards promote responsibility while also simplifying purchasing for smaller transactions. However, they’re also unique from other payment methods. For instance, all employees you issue procurement cards to are considered cardholders, which means they have their names on the card. 

This fact hints at another difference from older methods: they aren’t virtual. The virtual card is a payment pathway that only exists for internet purchases. You get a card number, expiry, and CVV but nothing else. Therefore, they’re useless at a bricks-and-mortar supplier.

On the other hand, you also avoid the fraud liabilities involved with a credit card or check. Because each piece of plastic has a different cardholder, it’s easy to track each P-card transaction. Not only can you take corrective action early, but you can also use the transaction logs to keep a department’s spending on target – and turn off the card if they spend too much.

→ Click here if you want to dive deeper into Purchasing Cards

Key takeaway

Procurement cards are a new financial product that helps companies buy things without a lot of hassle. They save money on procurement costs because they save a lot of work for your employees. And at the same time, they do away with many opportunities for fraud and unauthorized over-budget spending. Best of all, they’re as easy for your employees to use as a credit card.

Advantages and disadvantages of P-cards

Clearly, a purchasing card is a good tool for companies that need to buy a lot of small items. And at the same time, they can easily replace most functions of your corporate credit card because they work similarly from an employee viewpoint. Combined with there being no cardholder limit, these items are great for accountability while also being efficient.

However, as with most things, they aren’t perfect. Every payment method has drawbacks. Let’s look at the purchasing cards pros and cons so you can decide if this corporate card alternative will work for your business. You might also decide to supplement your purchasing card program with other small-dollar procurement methods.

Advantages of purchasing cards

First, many companies are adopting the corporate purchasing card for everyday purchases because they provide some flexibility without compromising on efficiency or security. But this is only the beginning. For most companies, this type of debit card can help make your employees’ lives easier.

  • The cards work similarly to prepaid cards. In this case, your p-card administrator can set daily or monthly spending limits, even though the money gets pulled from your company’s bank account. On the other hand, they’re on a traditional credit card network and can be used accordingly.
  • Management has ultimate control. Not only is the amount of spending restricted, but the merchant options can be restricted to one vendor if necessary. You can even issue the card without a credit limit by making it usable only with the manager’s permission.
  • They’re as secure as virtual cards. While you do get a piece of plastic and a reusable number, the usage limitations mean you are protected from fraud, because hackers can’t use the numbers.
  • Each p-card transaction is logged in real-time, along with the employee that made it.

Likewise, there are some disadvantages.

  • Employees don’t always understand the appropriate use of these cards. Therefore, when you give an employee a spending limit to use as needed, you might occasionally see an inappropriate transaction.
  • They require special software to use. By contrast, a credit card or reimbursement only requires your everyday accounting software.
  • Employee frustration. If there’s a problem, such as a manager being out of town with a per-transaction approval, tracking down an alternate approval can take time. 
  • Tracking. Although the P-cards log which employees make purchases, it can be hard if a different charge card is used for each subscription. If the correct cardholder leaves the company, then you will need to change payment methods.

With all of this said, purchasing cards are a very valuable tool for cash management and simplifying the procurement process for smaller expenditures. 

→ Click here if you want to know about Purchasing Cards

Key takeaways

No purchasing method is perfect. Some are more prone to fraud than others, and older methods can be cumbersome. However, purchasing cards has a lot of advantages, such as increased efficiency. As with all payment solutions, there are some disadvantages. But as we’ll discuss later, there are ways to make sure these valuable tools are an asset to your organization.

P-Cards vs Corporate Credit Cards

Traditionally, when an employee needs to spend money on something small they will get a corporate credit card from their manager. A larger transaction will usually go through the bidding and purchase order process. Unfortunately, while purchase orders are very fraud-resistant, they are also very expensive and require a lot of paperwork.

When employees use a business credit card there is often a lower level of accountability. One reason for this is that there are many employees who must either use the same card or have their manager use it on their behalf. This means that it can be difficult for accounts payable to track each card transaction to its owner.

That's where the purchasing cards vs credit cards distinction becomes important. To understand why we need to examine the differences between these types of payment cards.

Procurement card characteristics

Understanding the difference between a p-card and a business credit card easily demonstrates the usefulness of each. Although we've discussed the basic characteristics of procurement cards and prior sections, let's look at a couple of them in more detail.

One of the biggest differences between corporate cards and procurement cards is that you can have as many of them as you need. Usually, a corporate card program has a limited number of authorized users available. This means that a corporate credit card is mostly limited to key personnel, such as managers and sales professionals. 

On the other hand, with a purchasing card program, anyone who is eligible to spend money on the company's behalf can be a cardholder. Better yet, each P-card transaction can be immediately seen and logged by your finance team.

Another characteristic of Procurement cards that are shared with credit cards is that you can immediately pay a vendor invoice. Both card types work exactly like any other payment card in that you simply enter the card information to make a payment. The difference is that with a procurement card there are significant limits on what each employee is allowed to spend, and in many cases, where they can spend it. In contrast, you can use a company credit card anywhere.

Finally, depending on how your program is set up, card transactions are handled much like a debit card. That's because your program administrator will set a spending limit for each cardholder. Then, allowance money will be debited from your employee’s allowance after all card transactions.

→ Click here if you want to know the difference between Corporate card and P-Card

Business credit card characteristics

Business credit cards work similarly to personal credit cards. In particular, this means that you can use one of these credit cards anywhere that accept cards on that network. You can't set restrictions, so if there are violations of the purchasing card policy then your team will have to sort out the issue later.

Additionally, for startups and small businesses, the ability to obtain a credit card at least partially depends on the business owner’s credit. This means that if you are rebuilding credit because you went into a lot of debt to start your business, it may not be possible to obtain one of these cards. On the other hand, with a purchasing card, there's typically no credit requirement because it acts like a debit card.

This brings us to another point: You can get stuck with a large bill using a corporate card in a way that you can't with purchasing cards. Worse, if you're company can't pay the bill, you may get stuck with it. This is true because a lot of credit card issuers require a business owner or top management member to guarantee payment when a business is just starting.

What both card types have in common

At the end of the day, the most important saying that both of these cards have in common is that they can streamline the purchasing process. Especially if you're team needs to buy small items frequently, both purchasing cars and credit cards can't significantly reduce the amount of bureaucracy they need to go through. In addition, you won't need to fill out expense reports as frequently, because these small purchases can be paid for by the business directly.

→ Click here if you want to know about Business Purchasing Cards

Key takeaways

Purchasing cards and credit cards alike can make life much easier for employees who travel for the company or who must frequently make small, intermittent purchases, or pay for subscriptions. however, in most cases, a purchasing card is better because of the increased level of accountability. 

While it may pay to still have a corporate credit card for travel or other larger expenses that can't be paid with a purchase order, everyday employees can benefit from purchasing cards. Without corporate cards getting passed around the office, it is much easier to know who used the few that you have for purchases. Then, it's much easier to manage spending add track department budgets.

P-Cards and Purchase Orders

Just because purchasing cards are handy in many situations does not mean that they are suitable in all situations. In fact, your purchasing card program is unsuitable for large purchases. For example, you really do not want to pay your rent with a Visa purchasing card. Instead, your landlord will likely want either a check or an ACH transaction. Likewise, if you purchase an asset like factory machinery, you should also use ACH or check.

But, why do we make this assertion? People buy large items with their credit cards all the time, right? While this is technically true, for most people there is still a use for non-card transactions. For example, for businesses that need to document large expenses, you will find that the receipt provided with an ACH, or with the check stub, are excellent for tax reporting.

This distinction is only one of the differences between business purchasing cards and other payment methods. In particular, let's look at why most businesses still need to use purchase orders for large expenses.

Purchase orders involve a chain of purchase approvals

Whenever your company makes a large purchase, it should always go through a rigorous approval process. For one thing, there are regulatory issues to consider when you select a supplier. Especially in the wake of new sanctions being placed on other countries, all American taxpayers must be careful to avoid purchasing certain items from a large number of suppliers. During the purchase order approval process, your purchasing department will make sure that this potential vendor is compliant.

Another aspect of the purchase order approval process is that your managers must demonstrate that the expenses are necessary. While it isn't necessarily a problem if your office accidentally ends up with an extra case of copy paper, it can be a major inconvenience if you wind up spending a lot of money on duplicate product parts. By requiring approval for all major expenses, you can avoid most of those headaches.

Finally, purchase order approvals help ensure that there are few unauthorized expenses and that you pay the right price for the right items. In turn, this helps protect your company's cash flow and overall profits.

A procurement card provides convenience

On the other hand, purchase orders are too cumbersome for many small purchases. In particular, if a secretary needs approval to purchase more office supplies, the PO process may create too many delays. In this case, P card transactions are an appropriate way to keep your employees working and reduce costs.

Similarly, someone on your corporate team may need to speak with current or potential investors. They can easily place these investor relations expenses on a P card, then submit the receipt to accounting. This way, they can demonstrate financial responsibility without creating a headache for everyone. Better yet, the bean counters can instantly connect this expense with the appropriate departmental budget.

→ Click here if you want to know more about Procurement

Both purchasing approaches monitor employee spending

For large transactions and small ones alike, proper purchasing procedures monitor and control employee spending. As we mentioned above, management can restrict purchasing cards to only work at certain vendors, to only be able to spend a certain amount, or even authorize a simple purchase. This means that there are very few opportunities for abuse.

Likewise, the purchase order process includes important safeguards. Nothing can be bought with a purchase order without several levels of approval. This means that each purchase is carefully vetted for necessity and that the company does not overpay for goods and services. One reason for this is that each invoice must match a purchase order to receive payment.

When the bills come in, whether it's from a purchasing card or purchase order, each transaction is fully traceable. What this means in practice is that if an employee breaks the P card policy or sneaks in an improper purchase order it's easy to find out who did it. Then the company can take corrective action swiftly before a small problem becomes a big one.

→ Click here if you want to dive deeper into Purchasing cards vs credit cards

Key takeaways

Purchasing cards and purchase orders are both relevant, effective, and secure ways to spend your company's money. However, that is not to say that either tool is good for all transactions. Instead, your company should determine which method is better in what situations, then, you can create a policy and implement it. At the end of the day, this will increase accountability for all employees and make sure that the business’ money goes where it should.

Charge card vs credit card

To say that everybody is used to buying things and paying for them quickly these days is an understatement. For most of us, walking into a store, selecting your item, and checking out with a credit card or with debit cards is part of life. However, in the business purchasing space there's a lot more bureaucracy.

How are many businesses dealing with this problem? For many of them, it's with business debit cards. At the same time, a lot of businesses also use a charge card or business credit cards to pay corporate expenses. Understanding the differences between a charge card and a credit card is important, because each card type works differently.

How does a traditional credit card work?

Besides debit cards, most of us are familiar with personal credit cards. Simply put, we stick our credit cards into a machine that reads it. Then, we approve the transaction before it gets transmitted to the bank. Online, we enter all of the credit card information and then authorize the transaction. Finally, at the end of the month, we get a bill from our credit card companies that tells us current charges, unpaid charges, and whatever fees and interest we might owe. 

Business credit cards work much the same way. Not only are they used in the same manner to make a purchase, but your business will also get a monthly statement indicating how much is owed. And, like with personal credit cards, you have the option to pay in full or pay over time. Also, money doesn’t leave your account immediately, as it would with a debit transaction.

With that in mind, how does a business charge card work?

Charge cards work much the same way as a credit card, at least when it comes to making purchases. However, the big difference is that you must pay your balance in full every month period if you don't, your charge card may be frozen until the debt is paid off.

Here's another difference: with a charge card there is rarely any interest, and there may be fewer fees as well. This is unsurprising, considering that your business isn't going into debt with a charge card. For this reason, a charge card is less risky for the issuer and less expensive to administer.

Because you must pay off your charge card each month, it's important to think about charge cards as similar to debit cards. Although the money does not get withdrawn from your account immediately, you still need to ensure the money is available by your statement due date. On the other hand, you may have more protection in case of a purchase dispute. In this sense, a charge card is more like a traditional credit card than most debit cards.

What are the advantages of each card type?

Naturally, there are pros and cons to both card types. For a young business, the best credit card is usually one that requires the business owner to make a personal guarantee. This means that they will check the owner's credit score and other information. It also means that failure to pay the business credit card bill can result in an owner's credit score going down.

On the other hand, getting a charge card is less dependent on your credit score. One reason is that if your company doesn't pay, the bank’s losses are limited to the unpaid amount at the end of the month. At the same time, this also means that if you and your business have a lower credit score then you still have a decent chance of obtaining a charge card.

At the same time, you still have better protection than you would with debit cards due to lending laws, and because you won’t have money missing from your account while the dispute continues.

If you need more flexibility, such as when you're starting out and might need to buy new equipment, the credit card is probably better. Over time, as your business’s credit score increases, it'll be much easier to get a business credit card that doesn't have a personal guarantee. You can also try to get a secured credit card 2 start your business on the path it's a good credit. Over time, your business credit report will record all of those payments and open you up to better possibilities.

→ Click here if you want to know more about Charge Card Vs Credit Card

Key takeaways

There are specific advantages to a charge card vs credit card. Charge cards have an advantage over debit cards in that you don't need the money for purchases until the end of the month, and you don't need as good of a credit score to get one. On the other hand, a credit card helps build your business credit report and provides more flexibility to pay large or unexpected expenses.

Purchasing Card Best Practices

Modernizing your procurement processes requires more than just great purchasing software. Instead, it requires empowering employees to buy what they need for the business, while making sure each transaction is appropriate. In addition, you can’t do without proper accountability when people use a procurement card. 

The best way to achieve convenience and accountability is with a sensible P card policy. However, one of the biggest challenges with any new policy is making sure that it makes sense, and that it’s easy to follow. Nonetheless, you can achieve an ideal balance for the company and employees alike by following these P-card policy best practices.

  • Keep it simple. While everyone can agree that there’s more to a procurement card program than just handing out pieces of plastic and hoping for the best, this doesn’t mean you should write a book. Instead, write out guidelines for P card purchases that everyone should follow. Ideally, they’ll be intuitive, like requiring the employees use an approved vendor.
  • Include dollar amount limits in your policy. This means that your employees need manager approval before they spend more than that amount. You’ll want to provide dollar amount limits for different card activity types, such as travel purchases. Also, set a single transaction limit to enforce your policy whenever possible.
  • Link your card activity to accounts payable records. In other words, keep a careful record of what is spent at each vendor, and by which employee. Ideally, this should be recorded in real time.
  • Do an internal audit occasionally. Your AP staff and management should review card activity regularly. Using this technique, you can find irregular spend and other problems quickly, then take corrective action.
  • Have a different card for each employee. When you have as many purchasing cards as employees that can spend money, it’s easy to track unauthorized purchases. You can also use this information to categorize spending and debit department budgets as necessary.
  • Make approvals easy. Sometimes, an employee may need to spend more money than you have automatically authorized. In this case, ensure your employee can easily get permission for the transaction. 

→ Click here if you want to know Purchasing Card best practices

Key takeaways

The best way to make your purchasing card program work well is to have clearly-defined, yet simple, procedures. You can also enforce these rules through limits on the card, and by holding each cardholder accountable when something does wrong. Best of all, you can maximize the value of automation by integrating these cards with your procurement software and by making sure your vendor gets paid right away.

Accounting Process Automation

Large businesses and small ones need to keep careful records of all financial transactions. Not only is this required for a bank and for investors, but it's also critical for financial reporting at tax time. Unfortunately, for most businesses, it's hard to keep track of financial data. Small or fast-growing businesses in particular often find that their accounting software cannot keep up because all purchasing transactions require a journal entry, and traditionally, this was a manual process.

How can businesses improve their accounting process? One of the easiest ways is by using automated accounting software. The use of accounting automation helps businesses record each journal entry with greater accuracy, improves financial reporting, and tracks data better than a manual accounting system.

Well this sounds complicated, if you understand automated accounting best practices, you'll see that modern technology makes the accounting process much easier. Here are some best practices to consider as you upgrade.

  • Think about what your company needs in an accounting system. Not only does the software need to perform basic accounting tasks, but it also needs to track finance data. And while some businesses can get away with using generic accounting automation software, others require something more specialized. Otherwise, your staff may need to do too many manual tasks.
  • Look for something that integrates with the rest of your finance process. For example, the best accounting software will pull information from your bank statements and internal records. This way, your accountant will have all the data in one place. Plus, your accounting automation works better when it can perform most tasks instantly.
  • Don’t fire your human accountant. Even the most thorough accounting software needs human oversight. This means the periodic accounting tasks will need to be done or reviewed by a human. In addition, an accountant can review your periodic data and give an assessment of how well your business is doing.
  • Look for secure cloud storage. The worst thing that can happen is for all of your data to get erased without backup. Software companies like ControlHub keep all your finance data in a secure location that is less prone to disruption.
  • Your accounting software should do analysis. This means it's critical for your accounting automation to help the human accountant assess financial stability. Often, it'll do this by preparing charts or graphs. These accounting tasks are truly enhanced by automated accounting.
  • Accounting automation saves you money. if you do accounting the old fashioned way, you'll spend a lot more money on labor. Rather than letting people do all the accounting tasks, save their expertise for more important analysis. For example, they can look at the information from your accounting software and find a violation of the P card manual. Even the best accounting software cannot think for itself well enough to do this.
  • Select accounting software that's easy to use. You don't want your finance team to struggle well they learn to use very complicated accounting automation software. Instead, you want them to master accounting tasks quickly, then import data from other sources or programs, and be up and running.

→ Click here if you want to dive deeper into the Benefits of Virtual Cards

Key takeaways

Automated accounting sounds intimidating at first. One reason is that accounting generally is an old discipline that has often been resistant to change. However, accounting automation can be your best friend. It saves your accounting department a lot of time and energy by importing the data from other sources and minimizing the chances of human error. When you select your software, make sure that it meets all of your company's accounting needs. Otherwise, you'll make things more complicated with a whole bunch of software.

What to look for in purchasing card software

If you want to implement corporate purchasing cards, you have a lot of decisions to make. In particular, you need to find the right purchasing card software. That's because, unlike other payment types, you need special software to create, program, and manage each card.

Similarly, there are a lot of different software programs competing for your business. At ControlHub, we have one solution that works great for hardware-intensive, fast-growing companies. However, we are just one of many competitors. Let's look at the things you should consider when selecting prepaid card providers.

Ease of use

First of all, your software should be easy to use. When employees have trouble using software, they have a way of bypassing it. This would defeat much of the purpose behind corporate purchasing cards. Also, if a special P card transaction becomes necessary, it should be quick and easy to gain approval.

Integration with your accounting software

Often, a lot of money is spent using prepaid cards. For this reason, it's important that your managers and accounting personnel can quickly and easily identify who spent money on what, and when they spent it. This provides for a high level of accountability.

Top quality security features

Security should always be a top priority. Computer hackers and other fraudsters are becoming more ingenious, so you must protect your data from unauthorized access. However, security is about more than avoiding miscreants, It's also about legal compliance, corporate governance, and other record-keeping requirements from banks and investors.

Value for money

there's no question that modern prepaid card software costs money, and that some companies may consider it very expensive. However, you need to think about this in comparison to the money you can save. For one thing, purchasing cards makes procurement less expensive, because you don't need to approve every little thing. But in addition, if you can pay vendor invoices with a card on the spot, you may get some discounts. As you vet each software provider, think about how much money you can save.

Flexibility

At the end of the day, you are buying P-card software to make your life easier. Therefore, the more flexibility the software has the less hassle that you and your employees will face. The ideal situation will provide just the right amount of P-card transaction flexibility without sacrificing accountability or security.

Cash conversion cycle

It's almost finished without saying, but a major reason to be in business is to make a profit. However, there's more to making a profit than simply selling goods and services for more than they cost your company. Rather, you need to have a favorable cash conversion cycle.

What is a cash conversion cycle? Simply put, it is the amount of time that it takes for your company’s working capital investments in operations and inventory to turn back into cash. In other words, how long is a certain amount of money out of your company’s bank account?

How do we determine a company’s cash conversion cycle length?

The cash conversion cycle formula requires a large amount of data. You need to know how much inventory a company has, and how long it takes to sell that inventory. You also need to know how much working capital was spent, and when it was spent, to determine sales efficiency. Likewise, to calculate the company's cash conversion cycle you must also know how long it takes them to pay suppliers.

Once you have compiled all this data, you will be able to perform a few simple calculations. This will result in a number that can be either positive or negative. A positive cash conversion cycle means that you pay for goods before you sell them. A negative cash conversion cycle means that you pay for inventory after the finished goods have been sold. In other words, it means that your vendors are helping to finance your operation, often through corporate accounts or other finance tools.

Components of the cash conversion cycle formula

There are several different numbers that you need to calculate in order to obtain your company's cash conversion cycle. Often, companies will indicate their cash conversion cycle as part of regular reporting to investors and other stakeholders. This means that you can use that information to compare your company with others. Typically, a lower cash conversion cycle indicates a better run company, because it signals that working capital is managed very carefully. Their inventory turnover ratio is also high.

Days inventory outstanding (DIO)

This statistic is exactly what it sounds like: the number of days it takes for a company to sell its inventory. In most cases, the shorter this time period, the better.

To calculate days inventory outstanding, you must first determine how much inventory you have on an average day. Then, you take your average inventory and divide it by the average inventory cost. Finally, multiply that number by 365. One of the best ways to improve your business cash flow is by minimizing the days inventory outstanding.

Days sales outstanding (DSO)

Once you've sold your inventory, it's time for your company to get paid. The average amount of time it takes for your company to get paid after selling something is called the days sales outstanding. As with other cash conversion cycle metrics, this is an average.

Calculating days sales outstanding is actually easier than the last calculation. You take the average accounts receivable on any given day, divided by the average credit sales. Once you get that information, multiply the sum by 365. Now, you'll know how long it takes your inventory to be turned into cash.

Days payable outstanding (DPO)

Finally, it's time to express how long it takes a company to pay its suppliers. These suppliers can sell any category of goods and services, from small project components to paper and toner. From a supplier’s perspective, a lot of days payable outstanding is not good. Unless there's a formal credit system, days payable can hurt suppliers’ cash flow. 

With that said, if a company is low on working capital, having a supplier who is willing to accept more days payable can really save the day. Startups in particular are known for having relatively poor cash flow, and a larger supplier can sometimes absorb this. However, eventually, they'll want to collect their receivables.

Calculating the days payable outstanding is again relatively easy. First you take your average accounts payable and divided by the cost of goods sold. Then, you multiply this number by 365. In this case, a low number means that it doesn't take a company long to pay their bills. So longer it takes a company to pay those invoices, the more cash they're likely to have in the bank accounts.

Cash conversion cycle

Finally, these three numbers will produce the cash conversion cycle. This metric is expressed in days. The calculation is simple: DIO + DSO – DPO = CCC. Ideally, the CCC will be relatively low.

→ Click here if you want to know all about Cash Conversion Cycle

Key takeaways

A company's cash conversion cycle can give you a very clear picture of how well they are doing financially. While it is only part of the picture, a company that sells inventory quickly is usually efficient. On the other hand, if this cash conversion cycle is longer, there's a high chance that management has work to do. Fortunately, this number is easy to calculate. From there, you can use this number to compare yourself to your competition and the industry at large.

Expense recognition principle

One of the big challenges in business is calculating your return on investment (ROI). For some areas of business, such as marketing, the ROI is harder to calculate. However, if your business revenue depends on goods sold, then you can easily point to the cost of production and compare it to your revenue.

In financial accounting, one of the ways to calculate ROI is by using the expense recognition principle. In a nutshell, this principle states that the expenses and revenues for a particular business activity should be recognized in the same accounting cycle. Practically speaking, this means that if you sell one robot, you add the cost of this robot to your balance sheet when you get paid for it.

This approach is different from the revenue recognition principle, where you add revenue to your financial statement when the robot is sold. Then, if the customer doesn’t pay before the end of your accounting period, the receivable becomes an asset. You match this money with the accrued expenses to produce the goods sold.

Together, these two principles are cornerstones of accrual accounting and constitute a generally accepted accounting principle. These are set by the International Accounting Standards Board and help regulate what you put on an income statement.

Contrast with cash accounting

Some businesses prefer cash basis accounting over accrual. Here, the basic accounting principle is to recognize each revenue or expense item when cash changes hands. In other words, when a company gets the money for goods sold, they recognize the revenue, rather than following the matching method of the expense recognition principle and the revenue recognition principle.

Practically speaking, the use of cash accounting means that the income statement more closely matches a company’s bank balance. Similarly, the company tax return will look different and take advantage of different tax advantages.

→ Click here if you want to dive deeper into Expense Recognition Principle

Key takeaways

There are two different ways to reflect the costs and revenues from goods sold. One uses accrual accounting, and matches both items within the second accounting period. The other one leverages cash accounting to count revenues and expenses into the company’s income statement when cash changes hands. Depending on your company’s size and structure, you may be allowed to use the cash method. Otherwise, you’ll be required to use accrual accounting.

Expense report automation

One of the challenges startups face is the need to adapt their procedures as the company grows. One of the areas where growth can create bottlenecks fast is with expense reporting. Especially with a small business, it’s often easier to present each paper receipt along with an expense report form. Then, finance teams issue checks to employees as appropriate.

The trouble is that this expense reporting process can become cumbersome quickly. Matching every receipt to an allowable expense and department budget can take a lot of time and result in delays. When your company has outgrown the old-fashioned expense management solution we’ve used for decades, it’s time to look at automated expense management software.

What is automated expense reporting?

It’s a way to send employee expenses to a company’s expense management software with as little friction as possible. With expense reporting software, an employee can take a picture of their receipt and immediately upload it to their employee account. Then, it goes through approvals in the management software and spools to the AP automation tool, where the employee gets paid.

But, why do we still need expense report software?

With modern expense reporting methods, and especially with P-cards and other tools, it’s easy to wonder why we still need expense reports. However, no matter how well we plan ahead, sometimes an employee will need reimbursement. For instance, a company card might not go through, or there could be an emergency. 

Luckily, expense management automation helps deal with these problems efficiently. When an employee adds an approved expense to the automated expense management software, they can be assured of efficient repayment. This helps avoid having your company run up large debts to your employees, and prevents them from needing to pay interest due to slow expense reporting.

Expense management software also benefits the company

Here’s the thing: expense reporting is expensive for companies, especially with a manual expense management process. That’s because the finance team needs to manually examine all the paperwork. And while you still need to make sure only approved expenses get paid, your expense management software can help you categorize all the requests.

However, efficiency isn’t the only benefit. Automated expense management reduces the opportunities for fraud. That’s because automated expense reporting involves machine learning and OCR capabilities. This way, employees can’t use questionable expense reporting methods like double billing. And since there’s a permanent record of everything, your company can easily find the source of a problem early, before it becomes a major drain on company finances.

Finally, with modern management software, it’s easy to track department budgets. Programs like ControlHub post invoices to the right accounts as expense reporting happens, not later in the process. Meanwhile, you can be sure that your automated expense reporting is accurate because there are fewer opportunities for errors than with manual methods.

→ Click here if you want to know more about Expense report automation

Key takeaways

For most growing companies, automated expense management is the way to go. Unlike older expense reporting methods, there are few opportunities for errors and fraud. Likewise, modern management software lets you track expenses in real-time while reducing staff workload and the time before your employees get their reimbursements.

Strategic financial planning

Running a startup isn’t easy. One reason for this is that, at least in the early stages, you must do a lot of work to find those first few opportunities. In addition, initial growth tends to be slow since your products are often still in development or haven’t demonstrated their value yet. Usually, your financial plan includes getting more venture capital funding and other revenue, rather than turning a profit.

As your business grows, though, it gets busier and starts to gain more revenue from sales. To get through the transition and become profitable, you need to do some financial and strategic planning. The planning process will help to sustain your company’s growth and help it reach its financial objectives.

What is strategic planning? 

Strategic planning is the process of defining your company’s business objective and financial goals. Then, you’ll outline a way to achieve these long-term goals.

A close cousin to strategic planning is strategic financial management. Arguably, this is part of the planning process, but it focuses on a financial plan almost exclusively. In other words, it doesn’t pay as much attention to items outside the company’s financial performance.

Aspects of strategic financial management

Here’s the thing: no type of financial management can happen in a vacuum. If you’ve ever heard the expression “flying blind,” you understand the importance of data in helping achieve a goal. The most important aspect of the strategic planning process is analyzing the company’s financial management and performance.

For example, if a company’s rent is a threat to profitability, the financial plan should outline strategies to maximize real estate value. In some cases, moving might not be an option. However, there might be inefficiencies that can be addressed to help meet a company’s long-term goals.

Similarly, a strategic financial plan may include strategies to deal with rising expenses. Some companies might reduce package sizes, such as in the grocery industry. However, for a hardware-focused startup, changes might involve changing suppliers, adding new revenue opportunities, or raising prices. Thinking through the options is an important part of the planning process. 

Why is strategic finance important?

Sometimes, company managers can focus so much on growth that they forget about financial management. While nobody will intentionally mismanage money, it’s often important to step back and look at how a company is performing. Plus, the planning process lets managers identify new opportunities for strategic financial management and revenue growth.

Fortunately, the strategic financial management process benefits almost everyone, including employees and investors. When a company is profitable, it has more chances to give back and demonstrate that it’s a great place to buy, work, and invest.

→ Click here if you want to know all about Financial and Strategic Planning

Key takeaways

Strategic financial planning is an important process for most businesses, including startups. When you have a financial roadmap, it’s much easier to achieve your long-term goals and become more profitable. To make a strategic plan, look at your company’s metrics, such as financial performance and key profit centers. Then, maximize your opportunities while minimizing liabilities.

Business expense categories

As with individual taxpayers, businesses need to worry about whether or not an expense category is tax deductible. This way, they can avoid both penalties for improper deductions and excessive taxation. Fortunately, if you understand business expense categories, this is less of a problem.

Here’s a list of business expense categories, their definitions, and if they can be tax deductible. In brief, there are three expense types: essential expenses, discretionary expenses, and non-operating expenses. For tax reasons, you should always be able to categorize business expenses.

Essential expenses

An essential expense is one that your company can’t do without. Many items in this expense category are tax deductible to some extent as an operating expense.

  • Taxes. These can be federal, state, local, or even foreign.
  • The cost of rent and utilities. 
  • Labor costs, such as salaries and benefits
  • Any hardware or software your business needs to operate
  • Inventory, if applicable.

It’s worth noting that some of these are fixed expenses. In particular, you’ll pay a certain hourly rate or salary for each employee, and the taxes that go with it. Also, rent is usually the same from one month to the next, while you might be able to save money on utilities. This is one reason why expense tracking is so important.

Discretionary expenses

An expense category is discretionary if your company could theoretically sell goods or services without them. However, if the cost is incurred strictly for business purposes it becomes an allowable expense. This means you can charge them off on your business tax return. Otherwise, they’re non-allowable and you’ll have to pay tax on the money. This is one reason that knowing your business expense categories is so essential.

  • Research and development
  • Employee perks, like a gym
  • Travel
  • Professional development

Practically speaking, most companies will have at least one cost in this category.

Non-operating expenses

Finally, there are expenses that don’t directly go into running the business. For example, a business might make a capital expenditure like a real estate purchase. Your company can keep renting indefinitely, though this capital expense might result in cost savings over time.

Another type of non-operating expense is debt service and bank fees. These might be connected to capital costs, in which case they might be capital allowances. A capital allowance is essentially an investment that will help your business expand over time, and the IRS lets you deduct some of these from your taxes.

→ Click here if you want to know more about Business Expense Categories

Key takeaway

Most business owners don’t think about business expense categories, and instead let their accountants worry about it. However, if you understand how these categories work, you can help your financial planners maximize revenue while keeping taxes in check.

Finance Automation

Accounting and other financial process tasks have been performed manually for thousands of years. One reason why accounting has often resisted the automation of finance processes is the institutional tendency to always do things the same way. However, the automation of financial processes is an important step to increasing compliance and accuracy for this repetitive task.

These days, the invention of finance automation software has made finance automation possible. As a rule, financial automation has made accountant’s lives easier and more efficient. While some tasks like financial planning still need a human touch, the right automation solution can save a lot of resources.

Financial process automation is most effective in these areas:

  • Invoice automation. You can see this aspect of finance automation quite well with e-commerce. And, increasingly companies will get an invoice in their email immediately after order placement.
  • Workflow automation. Especially in purchasing and accounts payable, there are a lot of approvals and other steps to complete a transaction. This kind of finance automation makes everyone’s life easier and saves both time and money. It also helps prevent fraud.
  • Bookkeeping. If you have high-quality purchasing software like ControlHub, it’ll add transactions to your bookkeeping software automatically. This automates a large part of the financial process.
  • Payroll. This is one of the original areas of finance automation, which is unsurprising since a salaried worker gets the same amount of money every month, and bonuses are easy to program.
  • Taxes. For consumers, this is the most recognizable finance automation example after bookkeeping programs like QuickBooks. Businesses also automate their taxes, even though it’s more complicated.
  • Expense tracking, including money paid out to vendors and reimbursements.

→ Click here if you want to dive deeper into Automation of Finance Processes

Key takeaway

It’s easy to simplify a company’s financial process through finance automation. Especially if you buy and sell a lot of inventory, having the right automation tool is critical to your financial team’s sanity. Plus, you can be more confident at tax time.

Vendor Management best practices

As a purchasing manager, one of the hardest things you do is probably supplier management. This is especially true if you have multiple vendors for the same type of item, or if your supply chain is complicated. Fortunately, managing vendors is much easier if you understand the best practices for vendor management.

With that in mind, here are some of the vendor management best practices you should know.

  • Perform a risk assessment on potential new vendors. Between sanctions and other ethical dilemmas these days, be sure your vendor selection is compliant. Then, you can sign a contract with more confidence it won’t cause a problem.
  • Monitor contract performance. Every supplier will mess up occasionally, but if your supplier becomes a problem, you might need to speak with them. Each vendor contract should mention that their performance is subject to verification and provide a method to resolve any problems in the relationship.
  • Get to know them. Effective vendor management and performance optimization are best when you know the supplier’s management team. In addition, you can better secure your supply chain when you have a good relationship because your contract will likely get served first.
  • Don’t put all your eggs in one basket. It’s easy to give someone a big contract to provide multiple services. However, if something goes wrong with the supplier, it can really hurt your supply chain. In addition, you might have problems if you contract with a company for something they aren’t good at.
  • Treat them right. In other words, give your vendors a fair contract, and you’ll get better performance. You can also use sound contract management skills to make sure everyone gets paid on time, and that you make adjustments to a contract when it’s necessary.
  • Use vendor management software. For many companies, this is the same as their procurement software. However, you’ll probably need a vendor code for your accounting software, too. The best options include contract management software for the best performance.

→ Click here if you want to know more about Vendor Management

Must-Have vendor Integrations for hardware-centric, procurement-heavy startups and mid-size companies.

In addition to simplifying spending control through smart approval processes and p-cards, ControlHub further streamlines the purchasing process through their PunchOut Catalog integrations with hardware leading providers such as McMaster-Carr, Digi-Key, and Mouser, as well as with Amazon for office Supplies.

McMaster-Carr

Who’s McMaster?

McMaster-Carr is one of the top three sources for industrial parts and pieces. They have an impressive selection of products, ranging from small, mundane items to large, complex items. 

With a large inventory of quality products, there is no doubt that McMaster-Carr will have whatever you need for your factory.

What’s Punchout?

The advantages of integrating a Punchout Catalog into a company's existing procurement system are clear. Not only does it save time and money by streamlining the procurement process, but it also helps ensure accuracy by automatically adding purchase orders to the system. 

Moreover, customers can shop the eCommerce site with confidence that their orders will be quickly and accurately processed. This streamlining of the purchasing process leads to improved customer service, as customers can shop, select, and purchase products with ease. 

How to integrate your company’s Procurement Process with McMaster-Carr?

By using ControlHub, the most intuitive purchasing software for hardware companies, these companies can automatically access Mc-Master PunchOut to streamline their purchasing processes.

With McMaster PunchOut, hardware companies can:

  • Access a wide range of hardware products from McMaster-Carr
  • Get real-time pricing and availability
  • Place orders directly from their ControlHub account

→ Click here to see how the McMaster and ControlHub integration work

Digi-Key

Who’s DigiKey?

Digi-Key is the go-to distributor for anyone searching for board-level components, semiconductors, passives, interconnects, electromechanical, power, batteries, and sensors. With a wide range of over 1 million products from more than 2,300 suppliers, customers have access to an extensive selection. 

Moreover, the company offers competitive prices and speedy delivery, creating an excellent value for customers from all over the world. Engineers from companies of all sizes have found Digi-Key to be the ideal solution for their needs, due to their exemplary customer service and global reach of serving over 170 countries.

How to integrate your company’s Procurement Process with Digi-Key?

ControlHub is essential for hardware companies who want to streamline their purchasing processes. The software's user-friendly platform and range of features allow businesses to save both time and money. Companies can quickly search for products, create orders in one click, track and manage orders, and much more.

Moreover, ControlHub provides businesses with greater control over spending, enabling them to reduce costs and become more organized. In short, ControlHub is the ideal solution for hardware companies looking to optimize their purchasing process.

With DigiKey PunchOut, hardware companies can:

  • Access a wide range of hardware products from Digi-Key
  • Get real-time pricing and availability
  • Place orders directly from their ControlHub account

→ Click here to see how the Digi-Key and ControlHub integration work

Mouser

Who’s Mouser?

Mouser Electronics has established itself as an industry leader in the design and manufacturing of electronic components, semiconductors, and related products. Their expansive selection of components is used in a diversity of industries, ranging from automotive to aerospace to consumer electronics. 

Mouser understands the importance of delivering the best quality components at the most competitive prices. As such, they have built a global network of trusted suppliers and partners, to ensure their customers are receiving only the best products.

How to integrate your company’s Procurement Process with Mouser?

ControlHub is the ultimate purchasing solution for hardware companies. It offers an intuitive interface, single sign-on, direct access to the Mouser PunchOut Catalog, automated order synchronization, and powerful management capabilities.

It simplifies the purchasing process by providing a central system to create, monitor, and modify purchase orders with real-time updates on order and delivery completion. Furthermore, it streamlines administrative tasks such as the reconciliation and tracking of supplier invoices. 

With detailed analytics, businesses are able to make better decisions and gain deeper insights into their purchasing and inventory operations, allowing them to optimize their procedures and increase efficiency.

With Digi-Key PunchOut, hardware companies can:

  • Access a wide range of hardware products from Mouser
  • Get real-time pricing and availability
  • Place orders directly from their ControlHub account

→ Click here to see how the Mouser and ControlHub integration work

Amazon

Integrating your company's procurement process with Amazon PunchOut via ControlHub has the potential to save time, resources, and money. Not only can you access the Amazon PunchOut catalog with ease, but you can also request, approve, and track purchase orders in real-time. 

This can help you to make more informed purchasing decisions, as you can take advantage of advanced analytics to assess the cost-effectiveness of different items. Additionally, manual data entry and tracking can be eliminated, allowing you to move quickly and efficiently without sacrificing accuracy. 

These features enable you to have a more streamlined procurement process, while also helping to guarantee that your company has the resources to succeed. With ControlHub, you can save time and money while ensuring that your company has the resources it needs to succeed.

How to integrate your company’s Procurement Process with Amazon?

By using ControlHub, the most intuitive purchasing software for hardware companies, these companies can automatically access Amazon PunchOut Catalog to streamline their purchasing processes.

With Digi-Key PunchOut, hardware companies can:

  • Access a wide range of hardware products from Amazon
  • Get real-time pricing and availability
  • Place orders directly from their ControlHub account

→ Click here to see how the Amazon and ControlHub integration work 

Key takeaways

Getting the best performance out of your vendors isn’t as hard as you might think. Essentially, it’s a matter of following vendor management best practices. For instance, building a relationship with vendor management helps you get their best effort when it really counts. Similarly, vendor management best practices help ensure that the vendor gets paid on time. There’s nothing worse for performance than bureaucracy.

Corporate purchasing best practices

These days, there’s a lot of stress on the global supply chain. Combine this with inflation, and there’s a good chance your procurement team is stressed out right now. Fortunately, strategic sourcing and other procurement best practices can help you stay ahead during the most challenging of times.

But, what are the most important procurement best practices for 2022? We think we’ve found the answers.

Automation is your friend

The more manual processes you have, the more expensive it is. However, each procurement function you can automate will save you money. While there are some parts of the procurement process that resist modernity, you rarely need to do a procurement function entirely by hand.

The cloud is friendly

Similarly, you can implement most of your procurement strategy in the cloud. For instance, each procurement contract can be drafted and stored off-site in a secure location. This not only protects you from hackers, but it also reduces your in-house computing needs.

Similarly, cloud-based procurement contract management makes it easier to perform supply chain management. That’s because you can see, almost at a glance, when your supplier is facing problems beyond their control. Then, you can shift your strategic procurement to make up for deficits quickly.

Use automation for paperwork

This almost goes without saying, but you can complete a purchase requisition with the right software. Then, you can use it to complete every step of the procurement process, from approvals to invoice payments.

Furthermore, as procurement leaders we need to show the value of automation. It saves a lot of time, and it lets us get the best value for our money. The reduction in fraud liability is a nice bonus, too. Best of all, we get to have everything we need in one place, so we don’t have as many errors.

→ Click here if you want to know all about Corporate Purchasing Cards

Key takeaways

Automation can make your procurement practice, and work life in general, much easier. These days, there are few reasons to use an old, error-prone manual process to keep our supply chains full. Fortunately, quality procurement software can keep everyone happy, from line managers to accounting, and even the CFO.

Purchasing card wrap-up

The wild West of purchasing is over, at least in companies that use the latest technology to expedite and monitor employee spending. In particular, purchasing cards help your staff buy essential, small-value items with little friction and high accountability. 

For larger purchases, keep using purchase orders. With ControlHub, you can use both new and old purchasing methods to keep everyone honest. Best of all, your staff will be happy with less paperwork while you can be confident every dollar is accounted for.

Call us today for a free demonstration.