What is your spend? At face value, the question is simple, but the answer rarely is. Do you know the answer off the top of your head, or might it take you a few minutes to find it in your files? Maybe you don’t really know because getting that information has never been easy. Or maybe your first response is: “What exactly do you mean by ‘spend’?” It’s hard to have a conversation about anything before defining the basic terms of the discussion.

Imagine you want to quantify the value your procurement team brings to the organization in hopes of increasing your head count next year. To do so, you report that you saved the organization 2.5 percent of spend. But what spend do you mean? The actual dollar value of 2.5 percent can vary wildly depending on whether you mean 2.5 percent of the organization’s total expenditures or 2.5 percent of the spend that the procurement team can influence. When talking about spend – or money in any context – it’s important to be precise.

There is no single definition of spend that will be universally understood, even within the confines of public sector finance and procurement. The word by itself isn’t specific enough and doesn’t tell the whole story. Based on years of discussions with hundreds of public sector procurement directors, managers, supervisors and officers, this article seeks to clarify what we mean when we talk about spend, and how we can use that clarified meaning to discuss spend more effectively both inside and outside procurement.

Overall spend

The best place to start is at the top. Any organization will complete thousands, if not millions, of transactions each year, some that are spend in a procurement sense, and others that are not. Getting to the “overall spend” figure first involves excluding transactions that relate more to the movement of money than spending on goods, services or staff. Examples of these transactions include cross charging between departments, transfers to other public sector organizations, financial investment transactions and legal settlements paid. There may be other similar exclusions unique to an organization, but transactions for any category of goods, services or staff costs should remain in overall spend.

With those exclusions applied, overall spend should represent the organization’s expenditure on staff costs as well as the purchase of goods and services from external suppliers. Overall spend will always be less than the total value of all financial transactions, and should be relatively straightforward to calculate. Often this figure will be the same as, or similar to, the organization’s operating budget.

Non-payroll spend

Now let’s narrow down and further define spend. “Non-payroll spend” is overall spend minus direct staff costs such as payroll, retirement contributions and other costs that are paid to, or on behalf of, a staff member, and which are not directly for the purchase of goods and services from third parties. For example, while payroll and employee retirement contributions should be excluded at this stage, health insurance costs could go either way. This is because the organization usually has some choice and influence as to how health coverage is provided and through which vendor, but it may not be a type of spend that procurement can influence. Another exclusion local governments typically make at this stage is for any social service direct aid payments to individuals, or to individuals who provide social care such as foster parents.

Non-payroll spend is typically 25 to 40 percent of an organization’s overall spend and is the figure that really begins to resemble what procurement professionals would recognize as spend. With the exclusions applied in the steps above, non-payroll spend should include only the organization’s transactions with third party creditors for the purchase of goods and services.