For any finance and procurement team, a thorough understanding of spend patterns can be a game-changer. If you know where your money is going you can make strategic financial decisions and allocate resources efficiently. Spend analysis is a key tool for gaining this understanding.
It can provide comprehensive visibility of your organisation's spending habits, while also uncovering opportunities for cost reduction and process improvement. So, let’s delve into the best practices for spend analysis and explore the benefits gained from doing it well.
What is spend analysis?
Spend analysis is the activity of collecting, cleansing, classifying, and analysing expenditure data with the purpose of decreasing procurement costs, optimising processes, and monitoring compliance too. There are a variety of methods that can be used to conduct spend analysis to fulfil different needs.
Different types of spend analysis
● Transactional spend analysis: This type of analysis involves a detailed review of all transactions made within a specific period. It includes evaluating individual purchases, recurring expenses, and one-off costs. The goal is to identify spending patterns and to pinpoint areas of unnecessary expenditure. Transactional spend analysis can be particularly useful for organisations trying to improve their cash flow.
● Strategic spend analysis: This is a more detailed approach that goes beyond just looking at transactional data. It involves examining your organisation's overall spending strategy and how it aligns with business objectives. This could involve analysing supplier performance, reassessing contracts, and evaluating the effectiveness of current procurement strategies.
● Compliance spend analysis: Compliance spend analysis focuses on ensuring all organisational spend adheres to applicable laws, regulations, and internal policies. This might involve checking that suppliers have necessary certifications, ensuring contracts meet legal requirements, and verifying that spending practices do not violate any rules.
How does spend analysis work?
In the realm of financial management, spend analysis provides valuable insights into a company's financial picture. It can assist with aspects like budgeting and forecasting too.
What spend data to include
As well as different types of analysis, there are also different types of spend data that should all be considered if you’re to attain a holistic view of expenditure. Direct spend, for a start, could include things like raw materials, manufacturing costs, and labour costs.
On the other hand, indirect spend can cover expenses that support your company's operations but are not directly tied to your products or services, such as office supplies, software subscriptions, and maintenance services.
Contractual spend encompasses costs that have been agreed with suppliers or service providers. This often includes long-standing agreements for raw materials, equipment leases, or outsourced services. Non-contractual spend refers to incidental or ad-hoc purchases that occur outside these agreements.
In-depth supplier information should also form part of your spend data. This involves more than just who your suppliers are. It includes their performance metrics, reliability, and perhaps even ethical considerations. This information enables you to evaluate your supplier relationships and make informed decisions about future partnerships.
What to look for in your analysis
Effective spend analysis hinges on several key elements. A crucial starting point is recognising patterns or trends. This requires a thorough examination of recurring expenditure over time, answering questions like:
- Are there periods of unusually high spend?
- Do certain spend categories consistently consume a larger portion of the budget?
- Are there any discrepancies in expenditure?
- Can further savings be made?
Such insights can be instrumental in forecasting future outgoings and streamlining budget allocation accordingly.
Non-compliance can result in not only financial losses but also reputational damage. Therefore, it's imperative to promptly address any regulatory discrepancies to improve your financial compliance when analysing your data .
You should also keep an eye out for opportunities to boost the bottom line. Whether it's capitalising on discounts through bulk purchasing, or sourcing suppliers who offer more favourable prices.
What are the benefits of spend analysis?
Spend analysis is an important process as it offers valuable insights that can significantly influence your business's financial health. Some benefits of spend analysis include:
1. Reduced costs and savings identification
One of the most tangible benefits of spend analysis is the potential for reduced costs . By examining where money is going, organisations can identify areas of wasted expenditure or opportunities for consolidation. This could include eliminating redundant purchases.
2. Improved operational efficiency
Spend analysis also has the potential to help you understand and streamline procurement processes. Businesses can optimise their purchasing strategies, leading to time and resource savings. For instance, they might identify opportunities for processes to be automated where employees are wasting their energy.
3. Enhanced compliance
By tracking spend meticulously, companies can have more control and be more confident that they are adhering to the latest financial regulations. Corporate governance is, after all, an essential part of business operations today.
4. Risk mitigation
Spend analysis provides insights into supplier dependence helping businesses mitigate procurement risks. It also aids in ensuring suppliers adhere to their contract terms, enhancing the reliability of supply chains.
How to carry out a spend analysis: 3 steps
By following a set list of steps, spend analysis becomes a far less stressful process:
Step #1: Data collection
The foundation of any spend analysis lies in comprehensive data collection. This involves gathering all relevant data related to your outgoings. This data can include invoices, purchase orders, and more. It's crucial this data is complete and up to date so that subsequent stages can be completed to a high quality.
Step #2: Data cleansing
After data collection, the next step is to perform data cleansing to guarantee the accuracy and reliability of the information. This should involve the elimination of errors, duplications, and inconsistencies within the dataset.
Step #3: Data classification
After cleansing, the data should be classified into meaningful categories. This classification enables easier analysis and interpretation of the data. For instance, you might classify spend data by supplier, product category, department, or any other criteria relevant to your organisation's needs.
Take control of your business expenditure
Taking charge of your business expenditure is no longer an overwhelming task, thanks to the power of technology. With tools like Advanced Financials accounting software, you can automate and streamline this process leading to more effective expense management, giving you a clearer, more accurate picture of your organisation's financial health.
Cloud-based financial management solutions eliminate tedious manual data entry, providing better visibility into spending patterns, and automate activities related to tasks like accounts payable/receivable, bank reconciliation, and purchasing management.
With all finance-related activity in one place, the entire finance function becomes integrated, reducing the need for data reconciliation and leading to more accurate/complete reports.
As a result, you can be more confident in your decision-making around budgeting and investments, and ultimately achieve sustainable growth and success.
Spend analysis and spend data analytics FAQs
How is spend analysis used in procurement?
In procurement, spend analysis is used to identify opportunities for better terms with suppliers, alternative suppliers with cheaper prices, as well as purchased raw materials that are overpriced or underused.
How do spend data analytics work in supply chain management?
In supply chain management, spend data analytics can be used to identify partners that regularly cause problems within the supply chain, recurring roadblocks in the supply chain, or inefficiencies in the supply chain.
Can you perform a spend analysis in Excel?
Excel can be used for basic spend analysis, but not for complex analyses due to limitations handling large datasets and no real-time insights. Manual data entry and manipulation is also slow and can disturb the balance in your spend management efforts.
