Financial professionals are critical to securing the bottom line of companies by managing the accounts payable ledger and more. These standout employees optimize budgets by curbing fraud and maverick spending that can harm businesses’ profitability.
Spend analysis is one method that companies use to examine their core financial operations and maintain their long-term financial health. It allows organizations to learn how they spend their money on products, materials, and services. This process also enables finance and procurement teams to identify their primary expenses and purchases. Spend analyses also enable firms to make better forecasts, ensure budgetary compliance, and improve their financial performance.
Does your business need a comprehensive process to optimize its budget, control maverick spending, and better track your budget? 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:
- What are Accounts Payable (AP) spend analyses of general ledger balances
- The top four benefits for spend analyses for businesses
- How companies can conduct a seven-step spend analysis process
What Is an Accounts Payable (AP) Spend Analysis of General Ledger Balances?
Accounts payable spend analyses are critical processes within strategic sourcing. It enables businesses to get clarity into their organization’s overall money flow. This audit allows companies to review their payment, purchasing, and spending practices. It also improves efficiency and allows organizations to optimize their buying power. Additionally, this process allows companies to manage their long-term risks.
AP spend analyses also help businesses review their budgets and learn how money flows through their company. This practice enables businesses to track their income statement and account balances. Companies can analyze their spending practices and current liabilities. It also enables organizations to enforce contract compliance with their suppliers.
In an upcoming section, you’ll learn how to complete this process.
Four Benefits of a Spend Analysis
Spend analyses provide businesses with a qualitative advantage over their competitors. According to the American Productivity & Quality Center, companies that have completed an AP spend analysis lower their purchasing, procurement, and payment costs.
For instance, organizations with a spend analysis program and $5 billion in revenue may pay $8.5 million in procurement operations. Similar-sized businesses without a spend analysis program can use $19.5 million on the same activities. It represents a difference of $11 million. Here are four benefits this process can offer to help your business excel.
1. It Increases Your Spend Visibility
Spend visibility is more than a process where small businesses track their spending. It is a detailed analysis that provides insights into how money travels through businesses. It can also help companies identify suspicious activity or fraud.
This process provides a full history of how an organization spends each dollar during the entire purchase cycle, from their origin until they make the payment. For instance, if you hired a construction contractor for your company, it will identify the employee that approved the quote.
According to Ardent Partners, a research and advisory firm, best-in-class procurement organizations had higher levels of annual savings than their competitors (at 6.3 percent versus 6.1 percent). They also found 47 percent of these companies had better contract compliance rates than other groups in the market (at 66 percent versus 45 percent).
Ardent Partners explained that having spend visibility and using it to achieve a marketplace advantage are two different things. The advisory group said the benefit of spend analysis isn’t the information itself; it is how companies leverage the data that increases overall value and performance.
The research firm claims that finance teams and procurement professionals can achieve spend visibility by first arranging and classifying their data. Next, the organization recommends analyzing this historical spend information to identify issues related to pricing, compliance, risk, and supplier performance.
This analysis must produce reliable information about supply markets, pricing, trends, and business requirements. The process also enables sourcing teams to construct an optimized sourcing pipeline. Additionally, linking spend visibility to different processes enables businesses to make the best decisions using all available data.
2. It Identifies Outstanding Saving Opportunities
Spending analyses are insightful because they help companies identify new opportunities to reduce their total budgetary costs. The data they receive allows financial professionals and bookkeepers to understand their spending at the line-item level and develop a pipeline that optimizes their spending.
This process helps finance departments to construct better forecasting models that predict ways businesses can take advantage of savings in future quarters.
An enterprise-level platform can help 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 percent on its products. The company also said the platform has simplified its 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, Operations Manager 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.’
Read the entire case study here.
3. It Builds Superior Spend Forecasting Models
Spend forecasting integrates historical data analysis with market intelligence and forecasting trends from a variety of sources. It enables decision-makers to receive reliable insights they can use to optimize their supply chain, slash costs, and make strategic spend decisions. This process also allows companies to optimize profits and attain a market advantage.
Many small businesses analyze their purchasing and payment processes to get the most value out of their budget, so they transform their spend data into useful insights to learn how they typically spend their money. In the past, financial teams created their spend forecasting models manually. These professionals combined months of analysis to identify cost-cutting strategies. Unfortunately, most opportunities expired before they could capitalize on them.
The digital era has provided real-time descriptive analytics, or the analysis of current historical data. It has provided organizations with an improved spend forecasting method. The process allows businesses to build reliable spend data performance sets from a specific time period.
Descriptive analytics also identify patterns companies can leverage to create steady forecasting models that can improve their overall financial performance. It also simplifies holistic data categorization and trend analysis for businesses.
For example, this analysis can create or capture value through process optimization, which automates the procure-to-pay process to reduce invoice and purchase order life cycles. It also improves supplier relationship management and achieves increased productivity, cost reductions, and accuracy.
4. It Allows Companies to Track Diversity Reporting
Spend analyses also enable businesses to track their diversity reporting, which helps businesses become better corporate citizens and work with vendors from diverse backgrounds. Having this diversity reporting in a single place will help your company understand how it works with different vendor accounts. It will also uncover opportunities for you to engage with diverse suppliers.
Your finance team may respond to Requests for Proposals (RFPs), which are business documents that provide details about plans when companies solicit bids from contractors to help with the projects. They allow firms to review bids to examine their feasibility, the health of the bidding company, and the overall viability to determine if their firm will do what they proposed.
When your business already tracks diversity reporting data, it allows your sales team to excel. They can generate faster RFP responses to the federal government, oversight agencies, and contractors.
Research shows a spend analysis allows companies to find opportunities that save them 50% more money.
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.
1. Purchase the Right Accounting System Before Conducting a Spend Analysis
Your finance team should have the right accounting system tools handy before they do a comprehensive spend analysis of their financial statements. It will not only decrease maverick spend at your business. It will also enable your company to improve supplier management through strategic sourcing. Having the right tools also provides these additional benefits:
- It improves contract management by extracting insights gathered from actual data and journal entries instead of forecasted pricing and performance benchmarks for vendors.
- The right tools, like the Order platform, enable you to develop more efficient, strategic supplier relationships. The software helps you monitor vendor balances. It also allows companies to track merchandise inventory, eliminate redundant relationships, and shift focus to shared economic opportunities.
- These platforms enable companies to develop general cost reduction initiatives across their entire organization. Their insights reduce waste, increase efficiency, and lower procurement costs. Using software also allows companies to build value for a lower total cost of ownership for company assets. It also strengthens the bottom line of the business.
- This software allows companies to integrate indirect spend, ad hoc spend, payable balances, and project-based budgets into their spend data so that they can analyze them.
Accounting software can help organizations view their spend data. For example, NY Kids Club uses Order’s platform to manage and control 100 percent of their spend analysis, journal entries, and balance sheets.
“It was such an easy rollout when we uploaded everything into Order,” said Catherine Zapoll, NY Kids Club’s Operations and Compliance Manager. “I train all our center directors on Order, and it is the easiest training we have in the company.”
To read the case study, visit this page.
2. Define Your Objectives
The first step for your AP spend analysis process is to define your objectives. Once you have clear goals, it will make your data gathering and analysis efforts easier. Here are some common objectives to follow during your spend analysis:
- It helps you understand your spend at a basic level, including your cash flow, debit amounts, and current liabilities, so your team can identify savings opportunities.
- The process helps your company track key vendors so your finance team or procurement office can define and execute a strategic vendor plan.
- It allows senior managers to see key spend areas that affect their earnings before interest, taxes, depreciation, and amortization (EBITDA) margins. These include the COGS (cost of goods sold) and SG&A (sales, general, and administration) spend.
3. Identify All Spend Data Sources
During the third step of your spend analysis, your business must create an inventory list of all the data source systems where your spend data lives, including payable journals, payable subsidiary ledgers, and general ledger accounts. It should include all of your departments, including your accounts payable, general ledger, p-card, credit cards, and eProcurement system.
This step will help your accounts receivable to capture all of your spend data for analysis. If your business has many units, you’ll likely have to integrate multiple channels. The scope of your analysis will determine which systems you need to capture.
Although the process sounds easy, this process isn’t simple unless you have the right tools. Poor quality can result from the material coding, the nomenclature used, and the item descriptions. The availability of data won’t be useful if it’s not classified uniformly.
A simple inventory table should capture the total amount of data in subsidiary ledgers and may include the following datasets:
- System Name
- Business Units
- Type of Spend
An effective software platform can help 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 across continents, cost centers, functions, organizational belongings, and responsibilities. Since you’re pulling data from multiple systems, they will probably have different fieldsets.
First, identify the data you want to capture. Then use a shared schema set to capture what they mean. This step will ensure help the information-gathering process is simpler.
Most Enterprise Resource Planning (ERP) systems use unified methods to categorize their spend transactions into unique buckets. The most common approach they use is a General Ledger (GL) chart of accounts.
You can also use your own in-house or industry schema if that fits your purpose. However, there are additional schema classification options. They include:
- United Nations Standard Product 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 — Federal agencies use this code to classify businesses. It’s the primary classification schema system used by the U.S. government for reporting statistics.
5. Identify, Extract, and Import Your Data
During the fifth step, extract the spend data from your different ledgers. For instance, you can get it from your subsidiary ledger, general ledger, and accounts payable ledger in your ERP system.
Your company can also draw this data from the invoice management system. It should include all invoices and invoice rows associated with information about your suppliers, dates, totals, currency, accounts, and cost centers. Your accounts payable process should capture all information on an invoice down to the item level.
6. Cleanse Your Data
Step six involves cleansing, correcting, and normalizing your data in your accounts payable ledger. For instance, fix any misspelled item or supplier names. You can also eliminate any duplicates and managing errors in your supplier list. This step will help you better control accounts in your accounts payable departments.
7. Categorize Your Purchases
After all of your information is in an identical format, you must categorize your AP data. Classify all information starting on the account level. Next, analyze your suppliers. Since you’ve constructed your category tree based on how you organized your supply market, most suppliers will fit into one or several categories.
You can also create categories for invoice numbers, vendor accounts, vendor balances, and income statements. Pay attention to suppliers that belong to one or more categories.
Conducting Spend Analyses Can Save Businesses Time and Money
Businesses that conduct a spend analysis have a distinct advantage over their competitors. Research shows it allows companies to find opportunities that save them 50 percent more money. It also improves their spend visibility, cash flow, and vendor relationships. Businesses can use the process to produce 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 allow you to:
- Buy and approve products
- Set budgets for each accounting period and enforce approvals by users, location, product, and category
- Provides real-time analytics for actionable purchasing insights
Using platforms like Order will enable your finance team to conduct a spend analysis that tracks your spend and saves you money.