Having the right financial professionals on your team is critical to securing your company’s bottom line. After all, these are the people responsible for managing your accounts payable ledger and future planning, as well as optimizing your budgets by aligning spending, curbing fraud, and eliminating maverick spending that harms your profitability.
Spend analysis is a method the best financial professionals use to examine their companies’ core financial operations and maintain long-term financial health.
This type of analysis shows organizations how they spend their money on products, materials, and services. It allows finance and procurement teams to identify their primary expenses and purchases.
With this data, firms make better forecasts, ensure budgetary compliance, and improve their financial performance.
Does your business need a comprehensive process to optimize and track the budget and control maverick spend? In this guide, you’ll learn several ways your business or procurement department can conduct a spend analysis of your accounts payable ledger.
In this article, we’ll discuss:
- How to define accounts payable (AP) spend analysis of general ledger (GL) balances
- The top four benefits of spend analysis for businesses
- How to conduct a seven-step spend analysis process
What is an accounts payable spend analysis of general ledger balances?
An accounts payable spend analysis is a critical process within strategic sourcing. AP spend analysis helps companies improve their financial processes by:
- Reviewing payment, purchasing, and spending practices
- Gaining clarity into the organization’s overall cash flow
- Improving efficiency and optimizing buying power
- Managing long-term risks and enforcing contract compliance
- Reviewing budget and forecasting needs
- Tracking income statements and account balances
Accounts payable ledgers explained
An accounts payable (AP) ledger, sometimes called a creditors’ ledger, shows the past transactions between a company and its suppliers. It includes information such as amounts owed, dates, and other details relevant to the repayment of short-term liabilities.
(Image Example of AP ledger here)
Compiling an AP ledger brings together all available vendor payment information in one place. This makes it easy to track all your creditor payments, due dates, and associated information. The ledger also acts as a budgetary control tool that compares to the general ledger for accuracy. This is a dual control process, where one employee enters transactions and another employee checks for issues or errors.
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4 Benefits of spend analysis
Spend analysis provides businesses with a qualitative advantage over their competitors. For this reason, nearly 60% of organizations are considering using advanced and predictive analytics in their practices.
Many of these companies cite the following benefits from analyzing their spending data:
1. Increased spend visibility
Spend visibility is more than tracking company spending. It is a detailed analysis that provides insights into how money travels through the business. It also helps companies identify suspicious activity or fraud.
Spend analysis provides a full history of how an organization spends each dollar during the entire purchase cycle, from sourcing to payment. For instance, if you hire a construction contractor for your company, detailed transaction reporting will identify the employee that approved the quote.
2. Identifying outstanding saving opportunities
Spend analysis identifies new opportunities to reduce companies’ total budgetary costs. The data they receive allows financial professionals to understand spending at the line-item level and develop a pipeline to optimize that spending.
This analysis can also create or capture value through process optimization, where the procure-to-pay process is automated to reduce invoice and purchase order life cycles. This improves supplier relationship management and increases productivity, accuracy, and cost reductions.
An enterprise-level platform helps companies conduct spend analyses to track their cash flow and save money. XpresSpa, an airport spa destination, says that Order’s software has helped the company save 9.6% on its products while simplifying delivery to airports.
“From our first meeting in spring 2016 to now, Order has helped us find savings and solutions to match ever-increasing demand,” said Tesh Ramsarup, Director of Operation Services for XpresSpa. “The knowledge gained over the past three years has allowed us to make decisive choices to provide our people with the best tools and our customers with exceptional service—all while being conscientious of spending.”
You can read the entire case study here.
3. Superior spend forecasting models
Spend analysis constructs better forecasting models that predict ways businesses can take advantage of savings in future quarters.
Spend forecasting integrates historical data analysis with market intelligence and forecasting trends from various sources. It provides decision-makers with reliable insights they can use to optimize their supply chain, slash costs, and make strategic spending decisions. This enables companies to optimize profits and attain a market advantage.
In the past, financial teams created their spend forecasting models manually—they combined months of analysis to identify cost-cutting strategies. Unfortunately, many opportunities expired before they could capitalize on them.
The digital era provides real-time descriptive analytics (analysis of historical data). Companies use descriptive analytics to identify patterns they can leverage to create steady forecasting models and improve their financial performance. With holistic data categorization, simplified trend analysis, and improved spend forecasting methods, organizations build reliable spend data performance sets from specified periods.
4. Ability to track diversity reporting
When spending data is organized into a centralized platform, a wealth of data becomes available for analysis and action. Diversity is one such category. By identifying and collecting diversity information from current supplier relationships, businesses can examine and improve their diversity numbers across all accounts. This data both informs future spending and helps businesses communicate the positive impacts of their strategic partnerships.
How to conduct a spend analysis process of your accounts payable ledger
Now that you know why a spend analysis is critical, we’ll walk you through completing a spend analysis at your company. Here are seven steps to get you started:
1. Use the right accounting system to conduct a spend analysis
Your finance team should have the tools they need to do a comprehensive spend analysis of your financial statements.
You’ll recognize the right accounting system tool when it offers these advantages:
- Contract management improves because the tool extracts insights from actual data and journal entries instead of only from forecasted pricing and vendor performance benchmarks.
- Supplier relationships are efficient and strategic. Software like Order monitors vendor balances, tracks merchandise inventory, eliminates redundant relationships, and shifts your focus to shared economic opportunities.
- The tool offers insights for reducing waste, increasing efficiency, and lowering procurement costs. At the same time, it improves general cost reduction initiatives across your entire organization. Ultimately, you will be able to increase the value of your company assets at a lower cost and strengthen your bottom line.
- Indirect spend, ad hoc spend, payable balances, and project-based budgets integrate into your spend data for analysis.
Accounting software is designed to help your organization view all your spend data in one place for easier access and better analysis.
For example, NY Kids Club uses the Order platform to manage and control all their spend analysis, journal entries, and balance sheets.
2. Define your objectives
The next step for your AP spend analysis process is to define your objectives. Clear goals make data gathering and analysis efforts easier. Here are some common objectives to follow during your spend analysis:
- Understand your spend at a basic level, including your cash flow, debt amounts, and current liabilities, so your team can identify savings opportunities
- Track key vendors so your finance team or procurement office can define and execute a strategic vendor plan
- Discover key spend areas that affect your earnings before interest, taxes, depreciation, and amortization (EBITDA)—including COGS (cost of goods sold) and SG&A (sales, general, and administrative)
3. Identify all spend data sources
Next, create an inventory of all the systems where your spend data lives, including payable journals, payable subsidiary ledgers, and general ledger accounts. This should include all your departments, accounts payable, general ledger, p-cards, credit cards, and eprocurement system.
This step will help AP capture all your spend data for analysis. If your business has separate business units, locations, or verticals, you’ll likely have to integrate multiple channels.
Take care to create uniformity in your data sources throughout the next steps. Without uniformity across your organization, data integrity is easily compromised. For example, inconsistency in coding materials or describing products ordered can make it difficult to accurately analyze that data later on.
A simple inventory table should capture the total amount of data in subsidiary ledgers and may include the following data sets:
- System name
- Business units
- Type of spend
An effective software platform helps your company keep internal control of your data from subsidiary ledgers, general ledger accounts, income statements, and a variety of bookkeeping sources.
4. Create a spend category tree
Next, establish a spend category tree. This tree can span continents, cost centers, functions, organizational belongings, and responsibilities. Since you’re pulling data from multiple systems, you will probably have different fieldsets.
Identify the data you want to capture. Then use a shared schema to capture what that data means. This step will ensure the information gathered across data sources adheres to a unified standard for analysis.
Most enterprise resource planning (ERP) systems use unified methods to categorize spending transactions into buckets. The most common approach used is a general ledger chart of accounts. You can also use your own in-house or industry-specific schema if that fits your purpose better.
Here are two additional standard schema classification options:
- United Nations Standard Products and Services Code (UNSPSC): This global, open standard is an efficient way to classify your products and services. It is free to browse and download in PDF form. You can also download alternative formats from the UNSPSC website for $100.
- North American Industry Classification Schema (NAICS): Federal agencies use this code to classify businesses. It’s the primary classification schema system used by the US government for reporting statistics.
5. Identify and extract data
Extract the spend data from all your ledgers. For instance, pull data from your subsidiary ledger, general ledger, and accounts payable ledger via your ERP system.
You can also draw this data from your company’s invoice management system. This should include all invoices and invoice rows associated with supplier information, dates, totals, currency, accounts, and cost centers. Your accounts payable process should capture all this information on invoices down to the item level.
6. Cleanse your data
Cleanse, correct, and standardize the data in your accounts payable ledger. Fix any misspelled item or supplier names. Also, eliminate any duplicates and manage errors in your supplier list. This step will help you better control accounts in your AP departments.
7. Categorize your purchases
Categorize your AP data. Classify all information starting on the account level.
Next, analyze your suppliers. Depending on how you’ve constructed your spend category tree, suppliers may fit into one or several categories.
Create categories for invoice numbers, vendor accounts, vendor balances, and income statements. Pay attention to whether suppliers belong to multiple categories.
Use Order to simplify accounts payable spend analysis
Businesses that conduct spend analyses have a distinct advantage over their competitors—they see improved spend visibility, cash flow, and vendor relationships. Spend analysis produces superior forecasting models and diversity reports.
Before starting a spend analysis, select a reliable accounting platform. It will help your finance team conduct a thorough, error-free analysis. Choose software that will cover all the bases:
- Buying and approving products
- Setting budgets for each accounting period
- Enforcing approvals by user, location, product, and category
- Providing real-time analytics for actionable purchasing insights
A platform like Order enables your finance team to conduct a spend analysis that tracks your spend and saves you money.
For more information on using data and technology to drive business growth, download our complimentary ebook, “Creating a Growth Machine.”