Spend analysis is the process of cataloging your aggregate business spend throughout your organization, with the end goal of reducing expenses over the long term. If your company has different projects or divisions and recording is decentralized, conducting a spend analysis may be a challenge.
During a spend analysis, you identify, gather, categorize, and analyze everything your organization spends, and then use that analysis to find areas where you can save money and increase efficiency. You may also reap other benefits, such as discovering unapproved spending, improving compliance, and shortening delivery cycles.
Put simply, spend analysis is pulling together your company’s purchase history data from all sources to answer questions, improve efficiency, and build insight to inform future decisions:
- What is being purchased?
- Who is purchasing?
- What is the purpose of the purchase?
- Who are the suppliers?
- Are supplies being delivered as promised?
- Quality assured?
- Fairly priced?
- Delivered in a timely manner?
- Can we do better?
- Negotiate a better deal?
- Change suppliers?
- Faster delivery?
Having a handle on your spend management is critical for every financial aspect of business strategy, from hiring to product development. Once you know where your money goes, you can make better decisions about where and how it should be spent.
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6 Simple Steps For Conducting a Spend Analysis
Identify and consolidate your spend data
Your data may be stored in a variety of places. In many cases, each department – or even each project within each department – has a separate budget and accounting system. Each of these separate sources may have its own internal process: accounts payable, general ledger, eProcurement systems or other financial software. The first step is to identify all invoices and payments from all sources, and consolidate everything into one central database.
Clean the data
Information coming from different sources will need to be standardized. Fields may need to be added, for example, to identify where the order originated or define the purpose of the order, and purchases from international sources may require currency conversion.
Once the data is standardized, duplicate entries should be compared to ensure double payments were not issued, and then eliminated.
Identify the scope of your spend analysis process
Determine the minimal time period – quarterly, yearly, or multiple years – that will return an accurate picture of your current spend and still allow you to identify all recurring expenses.
Companies with decentralized budgeting systems may also want to limit the scope of each spend analysis process by department, division, or project.
Create a supplier list
Different departments may have similar requirements and use different suppliers. Identify the suppliers on your list with a tag or group designation in order to pull out and analyze prices, turnaround times, and other considerations. Identify the best suppliers and tag them preferred.
By breaking your spending into general categories, you’ll be able to see exactly where your money goes. Be as specific as your situation demands, whether your company orders building supplies, outsources digital services, or sends engineers to assess damage in remote locations. Make a category for every major expense: Personnel, travel, outsourced programming, legal, manufacturing supplies, office supplies, etc.
Analyze your data
With company spend data consolidated, take a close look at how your money is spent and make appropriate changes and informed decisions about future spend. Keep your data up-to-date in order to remain on top.
“Having a handle on your spend management is critical for every financial aspect of business strategy, from hiring to product development.”
The Benefits of Spend Analysis
All businesses are expected to maximize profits and minimize spend. You may realize unexpected savings with strategic sourcing by switching to preferred suppliers and negotiating volume discounts, by eliminating duplicate orders, or by reducing waste incurred by overbuying – which wastes money, man-hours, and storage space.
Resolve currency conversion issues
Ordering overseas supplies incurs costs over and above price concerns. Once you factor in shipping costs and tariffs, are you saving money over local suppliers by ordering base materials from China? This is a good time to compare.
Identify maverick spend
Some managers may order supplies that fall outside their approved budget, either intentionally or by mistake. If maverick spending is a widespread problem in your company, consider implementing a more controlled centralized procurement process.
Ensure contract terms are being fulfilled
Verify that suppliers are delivering on their contracts, including turnaround times, quantities, and quality.
Some suppliers will issue duplicate invoices if a payment is later than expected. Make sure you’re only paying once for each shipment.
Avoid late or penalty fees
Look for patterns in the data that indicate late payments, which can add up. When late or penalty fees occur, your company may lose preferred status with suppliers, and that will make them less willing to negotiate or answer customer service issues. You may also be missing out on contractual advance payment bonuses.
Stave off potential vendor issues by keeping track of your vendors’ annual revenue and credit score. Dealing with preferred vendors may put your supply chain and project progress at risk if the vendor fails. Your company is only as timely as its suppliers.
Many industries face complicated compliance issues. Your business may be required by company protocols, or state or federal government laws to comply with certain procedures. Government contractors, for example, may be required to get at least three quotes. Bid data and sourcing information can be stored in your database to make sure you don’t run afoul of the law or betray your company policies.
Automate and improve internal systems
Your spend analysis data can provide the basis for informed decisions on where you can improve processes. If your payment processing is consistently slow, you may consider an eProcurement System to streamline and speed up the process.
Keeping Your Spend Analysis Up-to-date
While initially consolidating company-wide data can be time-consuming, moving forward your records-keeping is clean, centralized, automated, and enriched with additional helpful data. With an automated PurchaseControl system, you can use Budget Forecasting to stay on top of every dime your organization spends…and make sure it’s spent efficiently.