What is Committed Expenditure?

Business Cost Control Procurement Purchase order Software
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Every time you order something from a supplier, you make a commitment to pay something in the future, also called a committed expenditure.

Since accounting systems are designed to look backwards, these are of little help when it comes to tracking financial commitments.  The consequence is often lack of control or ad hoc compensating manual processes to regain control.

committed expenditure
Figure 1 – Not tracking financial commitments (rear-view mirror controlling)

In this article we will describe what commitment expenditure is, the benefits you will get from tracking financial commitments and how your business can become forward-looking.

 

What is a Committed Expenditure?

First, a committed expenditure is defined as

“A commitment to an expense at a future date”.

 

It can also be referred to as committed cost. According to AccountingTools a committed cost can be defined as:

“A committed cost is an investment that a business entity has already made and cannot recover by any means”

In terms of accounting this means that you would track commitments often using purchase orders that are released over time when the commitment is invoiced from the supplier.

 

What are the Benefits of Tracking Committed Expenditure?

There are many advantages of tracking committed expenditure, the main ones being.

1 – Financial discipline

When you receive an invoice from a supplier, it is really little you can do to impact the cost. If the order was placed incorrectly or should not have been placed in the first place, it is too late to do much about it. Similarly, any approval at this stage is merely an exercise to ensure that the invoice is real and in line with what was ordered.

By moving the timepoint for when you approve and track to the commitment point, you ensure that you gain control and make a good assessment of the need and scope ahead of decision.

2 – Clear supplier agreements

Often financial commitments are placed to the supplier by using a purchase order (PO). There are many benefits of doing this, and one of the main ones is that you ensure that you are clear about what you are ordering and the terms.

In this way you limit the risk of surprise further down the line, and ensure that you maintain a healthy working relationship with your supplier.

See more about the benefits of using purchase order in your business here: 5 reasons to use purchase orders in your business

3 – Real time cost insight

If you also track your committed expenditure against a budget, you ensure that you have 100% control on your financial commitments at any given time.

Using a purchase order software to match your invoices with purchase orders, also ensures a good financial process and control over your open commitments (i.e open purchase orders).

tracking committed expenditure in real time

4 – Team efficiency

Staying in control of financial commitments is important for many stakeholders in the company. In project-based business this can be:

  • The purchaser or project leader who needs to ensure goods are received in time to reach important milestones.
  • The site or warehouse needs to have control on what has been received.
  • The accountant needs to know what was ordered and what has been received to be able to check and book invoices properly.
  • The controller/CFO needs to have control on the total cost in project and future cash flow requirements.
5 – Become forward-looking

Want to avoid surprises and get your team aligned. By using a purchase order software you get one source of truth and enable your team to focus on what is going to happen, rather than looking backwards trying to tie-together is already to late to influence.

Read more about how your business can benefit from tracking financial commitments here.

 

CostTracker is a cloud-based purchase order system designed to make cost control easy. The system includes unique features for cost control. CostTracker is designed to be easy to use and getting started with. CostTracker can be used a stand-alone or integrated with your accounting software.

CostTracker provides cost control for hundreds of companies worldwide.

 

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