What is spend analysis?

A detailed spend analysis helps your organization answer questions, like “What vendors are we spending money with?” and “Are there more cost-effective options available?” Finding ways to overhaul inefficiencies and overspending in your purchasing allows your business to increase profit and continue growing.

Moreover, detailed spend analysis processes uncover ways to improve the sourcing of materials, services, and products. By harvesting insights into how your company is spending money, you can lower costs associated with purchases and manage risks like fraud and payment mistakes.

How Spend Analysis Programs Work

Spend analysis starts with identifying your goals. Are you trying to lower procurement costs? How about improving vendor relationships and terms? Once you have your goals in mind, you can pull information surrounding those goals. This information can include both internal and external sources. Internal sources could be invoices, accounts payable ledgers, and vendor transaction lists. External sources include bank statements, credit card statements, and industry benchmarks.

After you’ve compiled your spend data, you will evaluate the information. Since it can be tedious to manually compile information, many businesses utilize expense management platforms to save teams hours of manual data entry and give you access to visualizations, like graphs and charts, to help you fully understand your expenditure data.

Direct vs Indirect Procurement Expenditures

The spend data you compile will be made up of two main categories: direct and indirect expenses. Direct expenditures are goods and services directly connected to your revenue. For example, if you are a manufacturing business, your direct expenditures might include warehouse labor and raw materials. Indirect procurement expenses are all other costs that are necessary to carry out operations, such as office wages, office supplies, bank charges, and insurance.

Each of these two categories will be managed differently when evaluating spending patterns. Direct procurement costs impact your ability to generate revenue, making them more difficult to change. Let’s say your company wants to switch suppliers for raw materials. What happens if there is a week’s delay when switching over? This could potentially result in a week’s worth of revenue lost. As a result, companies will look to strengthen vendor relationships and terms. If your company wants to switch suppliers, there need to be definitive benefits, like higher quality products or an increase in customer loyalty.

Benefits of Regular Spend Analysis

When your company reviews spend analysis data on a regular basis, you can unlock different advantages. Let’s go through some of these benefits in more detail.

Transparency Into Spending

Cost analysis gives you transparency into how your company is deploying resources. This information can be used to better manage the company and make more informed decisions surrounding growth and profitability. Additionally, knowing the types of materials and costs your company incurs leads to strategic initiatives to reduce costs and generate competitive advantages.

Reduced Procurement Costs

The spend analysis process locates inefficiencies and overspending, leading to lower costs. Let’s say you are reviewing invoices from a supplier and notice they charge a set delivery fee for each order. Instead of placing a supplier order each week and paying the delivery fee, you could make one large monthly order and save 75% of the delivery fees.

Spend analysis also allows you to reduce costs by considering alternatives. How much money could your business save by switching to a new supplier? Are there alternative products available at a lower price point? Consolidating suppliers, negotiating existing contracts, and cutting out unnecessary spending all result in more profit.

Improved Supplier Relationships

Understanding which suppliers offer you the best terms and value allows you to tailor your spending to improve relationships. Let’s say you have two suppliers that you purchase raw materials from. Vendor A gives you more flexibility in payment options and terms, while Vendor B is known for delayed shipping times and unexpected fees. With this information in mind, you can give Vendor A more business and improve the relationship.

Added Internal Efficiency

Spending data empowers your team to make more informed purchasing decisions in the future. For example, if your team understands that a certain vendor has more favorable terms, they no longer need to spend hours comparing vendors before purchasing. They know which vendor to give the business to, reducing the administrative burden and freeing up time for more valuable tasks, like consolidating contracts to leverage better discounts.

Quicker Fraud Detection

The spend analysis process identifies unauthorized vendors, which can be linked to employee fraud. Accounts payable fraud occurs when an employee creates a fictitious vendor and invoices. The vendor and invoice might seem legit, resulting in fraudulent payments. Reviewing your vendors on a regular basis or employing an accounts payable verification technology will allow you to detect fake vendors quickly, preserving your company’s assets.

Improved Forecasting

Spend analysis provides your business with baseline data to base future forecasts and projections on. This gives you the opportunity to develop clearer long-term plans and goals. Improved forecasting is also essential if you have multiple departments and strict budgetary needs.

Benchmarking Capabilities

Although no two businesses are created equal, understanding the spending habits of other companies in your industry can be beneficial. By reviewing your spend data, you can compare your company’s performance to others in your industry to determine if there are other ways you can increase efficiency and lower costs. For example, if you notice that your company spends 10% more on raw materials than other companies, it tells you that there are potentially other procurement options available to lower costs.

8 Steps in the Spend Analysis Process

Spend analysis will look different for each company. Nevertheless, here are eight common steps involved:

1. Define Your Goals – First, you need to define your spend analysis goals. What are you trying to accomplish?
2. Identify Data Sources – What data sources do you need to reach your goals? Do you need vendor invoices or bank statements? What types of internal reports are available to help you evaluate past spending?
3. Compile Data – Once you have all of your data sources identified, you need to compile data into a central database using a common format. This is where a spend analytics solution can be beneficial to reduce manual data entry.
4. Sort Data – Now, comb through the data and correct any transactions and descriptions that are inaccurate. For example, each division might have a different description for raw materials. Standardize the text and data.
5. Link Suppliers – Spend data can include vendors with different names or divisions. For each vendor, be sure they aren’t linked to another vendor, such as a subsidiary or a slightly different name. Linking all related suppliers gives you leverage to negotiate higher discounts.
6. Categorize Spending – After your vendors, descriptions, and data are all formatted, categorize spending. The categories you choose will be specific to your operations, such as office supplies, legal, direct expenditures, and indirect expenditures.
7. Analyze the Data – Determine which analysis tools you will utilize to evaluate your data. This could be Key Performance Indicators, industry benchmarks, or internal calculations. Streamlining your data analysis tools between periods generates the most comparability.
8. Repeat – On a set schedule, engage in spend analysis. This could be monthly, quarterly, semi-annually, or annually. The size of your company will determine the necessary interval. For example, if you only have a few dozen transactions each month, you might not need a monthly evaluation.

Spend Analysis Best Practices

You will need to tailor your spend analysis process to the needs of your organization. Here are some best practices to keep in mind when creating your internal process:

• Leverage Automated Spend Analysis – Certain expense management software programs will automate your spend analysis function with little to no work on your end. This includes automatic fraud detection, payment reminders, and more.
• Monitor Tail Spend – Oftentimes, businesses look at large expenses when conducting spend analysis. However, tail spending is just as important. These costs are low-value or high-volume that fall outside of your normal spend analysis parameters.
• Take Action – Having thorough spend analysis procedures is great, but only if you take action. If you notice inefficiencies or purchases you are overspending on, adjust future purchases. Spend analysis provides little value if you don’t take action.
• Adjust Processes – Developing internal spend analysis processes will come with trial and error. Don’t be afraid to adjust your processes as you become more experienced in analyzing your expenses.

Summary

• Spend analysis is the process of collecting, reviewing, and analyzing past purchases to uncover ways to save money, streamline processes, and improve vendor relationships.
• Spend analysis helps you save money, infuse transparency into purchases, improve supplier relationships, add efficiency to operations, and timely detect fraud.