Control of indirect spending is one of the most impactful aspects of your business. Although this can be difficult, many cash flow and financial issues that small and medium-sized businesses face can be controlled—through proper methods and processes.
Spend analysis is the cornerstone of this budgetary control. It gives Finance spend visibility to make changes and flexibility to drive growth.
This article provides a basis of understanding for spend analysis. You will learn:
- How to plan for and conduct spend analyses
- Best practices for accuracy and completeness of spend reports
- Pitfalls to avoid in analyzing spend
What is spend analysis?
The first step to controlling money in your organization is to understand where the money goes.
Spend analysis is the process of organizing, verifying, examining, and reporting on corporate spending to inform better decision-making.
The spend analysis process allows you to prepare and use data effectively. Here’s a step-by-step overview of the process:
- Collect all data and spending information into a single source of truth
- Classify and organize data according to pertinent spending categories
- Use analytics tools to parse and compare spending patterns
- Use resulting data insights to make decisions and reduce wasteful spending
How to perform spend analysis
Create a repeatable process around spend analysis to achieve better performance and easier reporting. Use these six best practices to create accurate and insightful reporting on purchasing data:
1. Define the goal
When setting a goal for analytics, you must know what data is needed, what impacts influence spending, and how you can improve. Attach relevant KPI metrics to a goal to ensure you measure your progress. With a clear goal, you’ll have a clear definition of success.
2. List data sources
Identify every pertinent data source in your analysis. Ask stakeholders to participate in this process to ensure you pull data from all departments and relevant systems (such as ERP, marketing, Finance, and CRM).
3. Consolidate and cleanse
Collect data in a centralized system, ideally a procurement or spend analysis software platform. Cleanse the data of duplicates, fill in gaps, and ensure the integrity of the data included in your analysis. Create an accurate and clutter-free record of your spend data to increase organizational confidence in the numbers.
4. Organize data
Once data has been collected from every possible channel and verified, arrange the data according to an accepted scheme or taxonomy. Data management enables a more detailed review of available data. This knowledge enables future projects through accurate spend categorization.
In the best-case scenario, all digital and non-digitized data (for instance, paper invoices or contracts) is collected, scanned, and digitized for future searchability.
5. Link and categorize
Connect your spending to associated sources such as vendor accounts, projects, and categories. Populating these fields in a database during the initial data prep allows you to conduct a more thorough analysis later.
6. Analyze and iterate
Prepare analysis and reporting relevant to your goal. Establish a workflow to verify and report on the data, and conduct regular analysis to improve spend optimization over time.
Like what you’re reading?
Sign up to get the latest purchasing & payments content.
Types of spend analysis
Depending on what you’re trying to accomplish with spend analysis, you may look at different categories of data in search of actionable insights. There are several primary types of spending that Finance can examine as part of an overall spend analysis program:
The most common form of uncontrolled spending for most companies is indirect procurement spending, informally called “tail spend”.
This aggregate spending is made up of small, inexpensive purchases. It may include spending for ad hoc orders, corporate card purchases, manager-approved spot buys, office supplies, and petty cash.
Tail spend often follows the Pareto Principle (AKA the 80/20 rule), where a small percentage of low-dollar purchases add up to a significant portion of expenses. Analyzing tail spend reveals opportunities to reduce unnecessary spending, leaving more cash available to power growth.
This is money your organization spends with vendors. Analyzing supplier spend provides insight into the number of providers you use, how much you spend with each, and the contract terms that influence those purchases.
By analyzing supplier spend, you may be able to consolidate your vendor list and save money through volume pricing. Use your data to negotiate better terms and pricing and to strengthen supplier relationships with a carefully selected roster of vendors.
This type of analysis looks at what categories of products and services you spend money on— such as supplies, products, fixed assets, debt, wages, or other cost centers.
Category spend may bring spending inefficiencies into focus, help inform budget allocations, or act as a guide for streamlining expenses. Category management controls procurement costs for high-ticket categories and aligns category purchasing with business needs.
More granular than category spend analysis is item-level spend. In this analysis, you look at each line item to determine what your business needs (and doesn't need) to run effectively. It can help reveal places to cut costs.
While negotiating for these items individually may be more time-consuming than productive (i.e. negotiating the price per pen in a deal), this type of spend analysis helps procurement teams service those supply needs and find potential savings opportunities.
In some cases, companies may improve cash flow and leverage by examining obligations by payment term. By analyzing this data and negotiating term extensions, you can lower your periodic liabilities and improve the capital efficiency of your cash.
Better contract terms can potentially lower company costs and improve the performance of vendors. Contract spend analysis helps Finance look at the terms at play in contracts. It may surface opportunities to negotiate for better terms, lower costs, and more.
It also allows you to compare price and terms analysis against industry benchmarks to gauge your current contract performance.
3 Best practices for better spend analysis
Now that you know the basic steps and types of spend analysis, use these best practices to refine further your procurement spend analysis program:
1. Start with a strong process
As with most Finance objectives, the spend analysis process is foundational to success. When implementing spend analysis techniques in your business, begin by identifying a repeatable, transparent process for collecting and reporting on data.
This begins well before the data-creation stage via a strong approval workflow. Start your process at the purchase requisition stage to prequalify all spending and set standards for how and when money will be spent.
The process should also include a reliable means and method of data collection. Without a way to ensure all data gets captured, reporting lacks integrity.
2. Enlist a champion
Spend analysis projects are in-depth, multi-departmental efforts. To ensure project completion, creating a point of contact or a project owner role for the spend analysis program is vital.
This person is responsible for collecting data sources, collaborating with vendors and internal stakeholders to gather information, and acting as quality control for incoming data. This stakeholder should have all the necessary tools to organize data in a transparent and accessible manner.
3. Use data to strategize solutions
Once spend data has been collected and analyzed, the real work begins. From the insights gathered through the preparation stage, you now have the power to make changes to spending and curb areas of unnecessary spend.
Use real-time data to guide how spend categories are prioritized, what departmental spend numbers are achievable, and what strategies are needed to streamline vendor lists and take advantage of volume discounts. Determine a plan to take action on revealed insights.
Why spend analysis projects fail
Spend analysis relies on consistency and accuracy across your organization. Many ineffective spend management practices falter due to these common issues:
Lack of process: Without a reliable process, maverick spending and missed data collection decay data integrity. Build a consistent procurement process with an intake or purchase requisition, approval workflow, departmental checklist, payment, and reporting process. Document this process and educate stakeholders on its use to ensure adherence.
Inconsistent data collection: Spend analysis only works if you have all the data collected in one place. In many cases, data stashed in siloed and decentralized systems is overlooked. The best solution is to use a centralized system with integration to collect data from every system and data source.
Manual administration: Manual data entry and tracking practices in spreadsheets open the door to missed data, errors, and inconsistent reporting. In most cases, purchasing programs contain too much data for effective manual processing. Use a spend analysis solution instead of Excel to eliminate the backlogs, delays, and errors that reduce the value of your spend analysis process.
How Order improves spend analysis
Keep track of indirect spend with procurement software to eliminate the issues most likely to derail your spend analysis efforts. Using Order, your organization can automate many manual processes and create effective guardrails for purchasing.
The integrity of a procurement solution ensures that your data serves as a source of truth for reporting and analysis projects.
- Create a well-documented, easy-to-follow process for buying and approving purchases
- Automate purchase order creation, catalog curation, strategic sourcing for purchases, invoice processing, payments, and analysis
- Integrate your data sources into all your major financial systems to facilitate the larger planning, budgeting, and forecasting process
- Use dashboards and visualizations to produce useful reporting for stakeholders at every level
If your organization is ready to create a modern spend analysis program with cost reduction, increased savings, and streamlined purchasing, request a demo of Order.