Maverick Spend: A Hidden Risk That Could Cripple Your Growing SMB
As small and medium-sized businesses (SMBs) grow, owners and founders naturally have to relinquish control over certain aspects of the business, including purchasing and financial decisions. While this delegation is essential for scalability, it also opens the door to one of the most common and costly challenges for growing businesses: maverick spend.
Maverick spend refers to unauthorized, unapproved, or non-compliant purchases made by employees outside of established procurement policies. These rogue expenses can quietly erode profit margins, disrupt cash flow, and, in extreme cases, even lead to business closure. For SMBs that are scaling rapidly, ignoring maverick spend can lead to financial chaos and expose the company to fraud risks.
Keep reading to dive into the risks of maverick spend, why it’s so critical for growing SMBs to implement proper controls, and outline measures businesses can take to rein in this costly issue before it spirals out of control.
What is Maverick Spend?
Maverick spend occurs when employees make purchases outside of a company's approved procurement processes. This can involve:
- Buying from unapproved suppliers
- Exceeding purchase order limits without approval
- Ignoring preferred vendor contracts
- Failing to follow company policy for price comparisons or quality checks
This unauthorized spending might seem trivial when it's a single order or a minor expense, but as a business grows, maverick spend can become a significant drain on profitability.
Why Does Maverick Spend Happen?
There are several reasons why employees engage in maverick spending, often unintentionally:
Lack of clear procurement policies: Employees may not be fully aware of the proper channels for making purchases.
Ease and convenience: Employees may use personal accounts, corporate cards, or other fast-tracked methods for purchases to save time, bypassing the formal approval process.
Perceived urgency: In some cases, employees may believe they need to make an immediate purchase to meet a deadline, skipping formal approval to speed things up.
Lack of oversight: If a company doesn't have strong controls in place, employees may make purchases without fear of repercussions.
The Dangers of Maverick Spend
Unchecked maverick spending can severely impact an SMB's financial health. Here are just a few ways it can negatively affect a business:
Eroding profit margins: Maverick spend means you're likely paying more than you should, whether it's due to employees choosing more expensive suppliers, missing out on bulk discounts, or paying higher prices than what you’ve negotiated with approved vendors.
Cash flow disruptions: Uncontrolled spending can lead to unexpected cash flow issues, making it difficult to manage the business's day-to-day expenses.
Compliance risks: In highly regulated industries, unauthorized purchases may lead to non-compliance with industry standards or regulations, exposing the business to legal or financial penalties.
Increased fraud risk: Without proper oversight, maverick spend can open the door to fraudulent activity, including employees misusing company funds for personal purchases.
Real-World Examples of Maverick Spend Gone Wrong
There are several cautionary tales of businesses—both large and small—suffering from uncontrolled spending, ultimately leading to financial disaster.
Example 1: The Retail Chain That Went Bankrupt
Tyco International Scandal (2002)
Context: Tyco International was embroiled in a financial scandal when its CEO, Dennis Kozlowski, and CFO, Mark Swartz, were found guilty of misappropriating $600 million from the company.
Maverick Spending: Kozlowski and Swartz engaged in lavish personal spending, including a $6,000 shower curtain and a $2 million birthday party for Kozlowski’s wife, all of which was charged to the company without proper oversight or approval.
Impact: The scandal resulted in massive shareholder losses, a steep decline in the company’s stock price, and a loss of trust in corporate governance. Tyco was forced to undergo major restructuring and leadership changes.
Takeaway: The Tyco case illustrates the dangers of unchecked executive spending and the importance of having clear accountability for financial decisions.
Example 2: The Construction Company’s Compliance Nightmare
A mid-sized construction company in Europe nearly faced regulatory fines after employees bypassed their procurement process to buy materials from unapproved suppliers. The materials didn’t meet the company’s safety standards, and had the issues not been caught in time, it could have led to legal liability. The company ended up paying a significant amount to remedy the problem, straining its financial resources.
How SMBs Can Control Maverick Spend Before It’s Too Late
Implementing strong controls to prevent maverick spend is critical for growing SMBs. Below are several strategies that can help ensure your employees follow procurement policies, thereby reducing risk and keeping expenses in check.
1. Implement a Clear Procurement Policy
The first step in curbing maverick spend is creating and communicating a clear procurement policy. This policy should outline:
- Who is authorized to make purchases
- Which suppliers employees must use
- Spending limits and approval processes
- Guidelines for exceptions or emergencies
Make sure your team understands the policy and that it’s easy to access. Regularly reinforce these guidelines through training and reminders.
2. Use Procurement Software
One of the most effective ways to prevent maverick spending is by using procurement software that automates the purchasing process. These systems can:
- Restrict employees to approved vendors
- Automatically flag purchases that exceed spending limits
- Route purchase requests to managers for approval before the transaction is completed
Procurement software also provides a paper trail, making it easier to audit expenses and track where money is being spent.
3. Enforce Spending Limits and Approvals
Ensure your procurement policy includes clear spending limits* that require approval for larger purchases. This can be done manually or with procurement software, but the key is to make sure no one can exceed their budget without proper authorization.
Managers should also be required to approve any purchase over a certain threshold, ensuring that larger expenses are thoroughly vetted.
4. Introduce Corporate Credit Card Controls
If your business uses corporate credit cards, it's crucial to implement tight controls. Card usage should be limited to specific types of purchases, and all transactions should be tied to the company’s procurement policy.
Regularly review and audit credit card statements to ensure employees aren’t making unauthorized purchases. Some companies limit credit card usage to certain employees or allow it only for pre-approved purchases.
5. Set Up Vendor Management Practices
Ensure that you have a vendor management system in place. This system should include an approved vendor list and negotiated contract terms, such as pricing and delivery schedules. Employees should be restricted to purchasing only from these approved vendors to avoid unexpected costs or quality issues.
Encourage employees to get competitive quotes only from approved vendors to ensure that pricing remains within the boundaries of pre-negotiated contracts.
6. Regularly Audit Purchases
Performing regular audits of company purchases is one of the most effective ways to detect maverick spend before it becomes a major issue. These audits should review:
- Purchases made outside the procurement system
- Expenses that don’t align with the company’s procurement policy
- Spending patterns that indicate fraud or abuse
By identifying problem areas early, you can take corrective action before rogue spending spirals out of control.
7. Create a Culture of Accountability
Finally, make procurement compliance part of your company culture. Employees should understand that unauthorized spending won’t be tolerated and that they are expected to follow the proper channels for purchasing. Rewarding teams for staying within budget and complying with policies can further reinforce the importance of proper spending.
Conclusion: Control Maverick Spend Before It Controls You
As your SMB grows, delegating purchasing authority to employees is necessary, but it’s crucial to establish strong controls to prevent maverick spend. Unchecked rogue spending can cripple your cash flow, erode your profit margins, and expose you to fraud and compliance risks.
By implementing clear procurement policies, enforcing spending limits, and using procurement software to automate and monitor purchases, you can keep maverick spend under control. These steps ensure your business stays financially healthy, allowing you to focus on growth and success rather than plugging financial leaks caused by unauthorized spending.
Controlling maverick spend is not just a good idea—it’s essential for the long-term survival of your business. Don’t wait until it’s too late; put the right controls in place now and protect your business from financial missteps that could otherwise lead to disaster.
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