An effective, smoothly functioning commercial card program is the product of solid groundwork. Among other things, that means doing the homework to identify spend categories and limits, always with an eye to balancing ease of use with the need for control. In addition to conducting a thorough spend analysis, spending targets have to be established, and control mechanisms must be put in place. Merchant Category Codes (MCCs), Standard Industry Classifications (SICs) and Authorization Controls are key to enhancing spending controls.

Companies that took part in the Visa Procure-to-Pay Best Practices study differed in terms of the commodity types that they had brought in under their commercial card programs, and also in terms of the dollar amounts of the card spending targets they have established. In spite of these differences, a common feeling reflected in the study was that commodity and spend targets are critical elements among the parameters that have to be established for eligible Purchasing Card transactions. This helps to ensure that cards are used appropriately and the company gains maximum benefit from the program.

The process of determining commercial card parameters requires a thorough spend analysis. This is a multi-step process, which starts with an examination of the company’s Accounts Payable data in order to identify patterns such as average spend and number of transactions by commodity. The goal here is to identify high-volume or recurring transactions and transition these to the card program. Current approval requirements (signature approvals or purchase requisitions, for example) can vary by commodity and dollar amount, and these should be analyzed to determine which items require more strict back-end auditing procedures in order to maintain the desired controls. Card Issuer experience is invaluable at this point in helping to determine which purchases should be eligible for card use.

Spend targets need to be set for various commodities, company divisions and functional roles. The establishment of these targets is critical in determining how well the card program will function and how the company will benefit from it. In determining the targets, those responsible for setting up the program should keep in mind not only the desired economies and efficiencies but also the dollar range that typifies purchases within the various eligible commodity groups.

Generally, targets should be set slightly higher than the cost of the most frequent purchases (e.g. office supplies at $500). This enables the bulk of current transactions to be transitioned into the “eligible” category but also sets a firm ceiling for approval and control – and of course the limits can be adjusted later as required. In some cases limits can be set at different levels within the same business units or user groups: setting higher limits for cardholders identified as ‘super users’ will help to increase the volume of spend that goes through the commercial card program.

Overall corporate goals may also play a role in determining how limits are set: one company that took part in the Visa Procure-to-Pay Best Practices study wants to reduce the number of requisitions processed, the bulk of which usually were smaller dollar transactions, to remove a substantial amount of paperwork. The decision was to move all purchases under $1000 onto its purchasing card program.

Like spend targets, credit limits need to strike a similar balance between control and ease of use. The decision here will be based on an analysis of monthly purchasing volume, and limits can be reviewed and adjusted as required once the program is up and running. It is sometimes helpful to review spending more frequently during the pilot and rollout phases of a new program, and gradually decrease the frequency as the desired spending habits become better established.

Some companies in the Visa Procure-to-Pay Best Practices study gained added leverage from a high degree of automation by programming purchasing parameters right into their enterprise resource planning (ERP) systems. They were thereby able to reduce the number of purchase approvals required while maintaining and even enhancing control: and some participants actually eliminated purchase approvals altogether.

Merchant Category Codes are often employed as a means of blocking user attempts to purchase from vendor types that are outside of prescribed policy. More obvious categories would include jewellery stores, furriers and spas, but any categories can be used depending on corporate strategy and the degree of spend control desired.

However MCC blocking is not a blunt instrument. It must be applied with discretion, and in ways to not inadvertently impede legitimate purchasing. In the case of one company that took part in the Visa Procure-to-Pay Best Practices study, the Purchasing function and sometimes even an individual user will occasionally ask to have a merchant category unlocked so that they can buy from a particular vendor. The fact that permission must be sought before what is technically an ‘off-policy’ buy demonstrates the validity of MCC blocking as a control strategy.

But beyond the blocking/control function, MCCs and SICs can also help program administrators categorize spend and purchasing data, enabling them to classify and consolidate supplier spend data and making comprehensive, standardized reports available. The codes are typically provided by Card Issuers and suppliers to enable reconciliation with general ledger codes. Often, SICs are associated with suppliers and MCCs with transactions in an enterprise ERP system to provide a view of commodity-level spend. Successfully using MCCs and SICs for spend and purchase data categorization depends on carefully defining the spend classification method up-front – including teaming up with Card Issuers, suppliers and other providers of SIC and MCC data – as well as determining how to incorporate the data into the company’s ERP system or spend data repository or other reporting methods.

One large company reduced the time required for reconciliation processes by using MCCs to code G/L and tax logic into its systems, which eliminated the need to have cardholders create expense reports. The users can now simply verify pre-populated expense reports, and the only time manual intervention is required is when incorrect expenses have to be re-allocated. Another company added SIC codes to its supplier file in a strategic sourcing initiative, and thereby cut the time required to issue Requests for Proposal in half.

Regardless of how a commercial card program is structured, or the type of organization it serves, the establishment of concrete spend targets and limits is one of the essential first steps in ensuring success. Determining how to set these parameters requires a thorough spend analysis, to identify where the maximum advantages can be gained.

Similar care must be taken in using MCC and SIC data. MCC data can readily be used to block vendor categories that the organization wishes to keep outside the commercial card program, but MCCs and SICs can also be powerful data categorization tools, enabling the organization to deepen its understanding of spending patterns – and the value of this information is multiplied further when it is integrated into enterprise IT systems.