If you’re using GL codes from finance to classify spend data, I see you. It feels logical – after all, why would you bring an extra set of information into the mix when you’ve already got something you can work with? But I’m afraid to tell you this won’t help you; in fact, it’s more likely to hinder you.
Why is this? Well, it’s because finance and procurement look at numbers through two very different lenses. Finance tracks spend through cost centres at a high level, whereas procurement needs line-level detail to interrogate – think office expenses vs pens, paper and pads.
So, please stop! Here’s why…
What is a GL code?
GL code stands for General Ledger code. They’re sometimes referred to as a Nominal Code and are used by finance departments to track spend. Every transaction is assigned a GL code, which typically follows a structured numbering system to help categorise spending. They vary by company – there’s no such thing as a universal GL code.
What’s the problem with using GL codes to classify spend data?
As convenient as they seem, GL codes can be red herrings for procurement departments. That’s because if you’re trying to track department or product spend, or even a specific project, you won’t get a true picture. You need a more robust method – if you’re only using General Ledger codes, I can almost guarantee they’re wrong or too generic to negotiate with suppliers, forecast, plan, or analyse spend. In fact, after nearly two decades in data, I believe that as many as 90% of GL codes are unreliable for procurement.
“You’ll almost always find something classified under a GL that shouldn’t be there. The result? Items logged under random GL codes. It’s particularly common in large corporates.”
Here’s an example
Let’s imagine the sales department have already maxed out their budget for the quarter, but they’ve just ordered some brand-new leaflets. How? They sneaked it into marketing’s budget, under a different GL code.
Cheeky? Yes. Common? Very. Especially when you stop to think whether an order for 5,000 leaflets would look out of place in either of those budgets. Probably not, unless you look closer. If you’re classifying data using GL codes, it would be almost impossible to spot.
GL codes – great for finance, not so great for procurement
As I already mentioned, accountants love GL codes because they provide an excellent overview. But if you’re in procurement, you need more detail. Without accurate spend data, you won’t have a true picture of what you’re spending, and that means you’ll struggle to:
- negotiate better deals with suppliers
- reduce spend
- check compliance
- support good business decisions.
Thoroughly classified spend data can also protect your business against fraud or embezzlement. Someone may have tried to mislead or take advantage of you. If your spend data is messy or someone has tried to hide something, it can be difficult to spot anomalies when you use GL codes to classify spend data. No one wants to think the worst of their staff, but these cases happen surprisingly regularly.
What should you use instead of GL codes?
At The Classification Guru, we like to use supplier name and invoice line description to classify data. This helps us get the most accurate information out of your data so you can make the best business decisions.
“Be warned, some companies might classify your spend data based on the GL code. We’d recommend you steer clear!”
Good data is worth the wait
Good classification takes time – depending on your data set, it can take a few weeks to a couple of months. But you’ll be pleased you waited when you upload your brand-new, shiny data set with all that neatly organised information.
Do you and your team want extra support to classify your data? The team at The Classification Guru and I can help in several ways. From bespoke training sessions to customised spend taxonomies to data diagnostics and done-for-you spend data classification, we’re here to fix your data, putting you back in control.
Book a chat with me at susan@theclassificationguru.com.
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