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What is a Spending Policy?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 August 2016
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A spending policy is a logical and organized plan of action that is used to determine how available resources are spent. A policy of this type is often employed by governments as well as businesses, and aids in the process of controlling spending. Development of a viable spending policy is crucial to the ongoing operation of a business, since it helps to ensure the goods and services needed to operate are on hand and that money is not being wasted on non-essentials.

When putting together a company spending policy, it is important to identify not only what type of expenditures are necessary for the ongoing operation, but also to prioritize those expenditures so that goods are purchased in a timely manner. Doing so has several benefits for the business. By scheduling spending according to specific purchasing guidelines, it is possible to keep inventories within reasonable limits and avoid paying taxes on goods that languish in storage for long periods of time. In addition, the establishment of spending rules that control the process of spending will mean that resources are on hand to deal with unanticipated issues, rather than being tied up in existing inventory.

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Writing a spending policy is very much like writing a budget, in that it is necessary to determine the types of purchases needed, when those purchases should take place, and the quantities that may be permitted with the purchase of each good or service. Many companies operate a purchasing department that is responsible for making sure the spending policy is observed. This often translates into a structure in which departments submit requisitions for necessary goods for review by a purchasing agent. The agent evaluates the requisition, and if approved assigns a purchase order to the request and authorizes the placement of the order. This approach makes it easier to process payments to suppliers and to track those expenditures in light of the budget set for each department within the company structure.

At its best, a spending policy makes it possible for a business to make the most prudent use of its financial resources, ultimately resulting in the production of goods and services that are sold to customers and generate revenue. When a spending policy is incomplete or poorlyyes defined, the chances of keeping expenses within reason and increasing the bottom line of the company are decreased significantly, sometimes to the point of causing the business to fail.

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