Spend Analysis: What It Is and Why It’s Essential for Your Business

Spend Analysis

As a business owner, it’s important to know exactly where your company funds are going. Beyond having a general idea of the amount of money being spent, you need to know how much is going toward salaries, utilities, travel, and tools on a daily basis.

Spend analysis ensures that you don’t find any unpleasant surprises in your expense reports. In this article, we’ll discuss what spend analysis is, why it’s so essential, and how to implement it for your business.

What Is Spend Analysis?

Basically, spend analysis gives you a detailed account of what company funds are being used for. When you have clear insight into all the areas where the business is investing money, you’re better able to plan for the future.

If you have all the documentation for company transactions, you can make changes to the company’s spend structure as well. For example, you might increase the operating budget of one department and decrease that of another to optimize spending.

The Power of Spend Analysis

The main benefits of spend analysis include:

  • Full visibility into corporate spending. By bringing together data from across the organization, spend analysis can increase transparency and allow you to compare spending between departments.
  • Savings opportunities. Once you have visibility into spend patterns, you can spot places where you can cut costs. You might be able to consolidate suppliers, switch to alternative products, find vendors that offer better value, or negotiate contracts.
  • More efficient procurement. Improved visibility and accuracy make all your financial processes more efficient, which in turn supports stronger relationships with key suppliers and increases employee productivity.
  • A more resilient supply chain. Trustworthy spend data helps reveal weak links in your supply chain, like non-contracted vendors, non-contracted spend, or non-performing suppliers. Tightening up contracts and switching to more reliable suppliers lowers the risk of supply chain disruptions.
  • Internal benchmarks. Spend analysis reports allow you to benchmark performance across business units. This lets you compare expenditure and ROI and improve strategic decision-making.
  • Leverage spend data for business goals. Procurement might seem the most relevant when it comes to spend analysis, but other departments like finance or marketing can also benefit from it. Managers across the company can leverage spend analysis to understand purchasing patterns and make strategic decisions.
  • External collaboration. Group purchasing can help all the companies in the group to cut costs by negotiating better pricing and/or contract terms. Once you’ve run spend analysis in procurement, you can easily identify shared suppliers and commonly ordered items, and then propose a joint purchasing agreement.

What Does Spend Analysis Help You Achieve?

Not every business has the same needs and challenges. As a result, the budget allocated to each department differs. The spend structure also varies based on your business model. With that in mind, here are some things that spend analysis can help you achieve:

  • Generate a precise financial report at the end of each month and year.
  • Find areas where you can cut costs.
  • Predict expenditure for the coming months.
  • Manage risk and expand your set of vendors.
  • Spot fraudulent payments.
  • Ensure that all employee spending is authorized.

How to Implement Spend Analysis

If you’ve never done spend analysis for your business before, this section will give you an overview of the process. Keep in mind that it’s quite elaborate and time-consuming if you choose to do it manually. Here are the basic steps to do your own spend analysis:

1. Set Clear Business Goals

Before you begin, you need to have concrete goals regarding company expenses. This includes a long-term goal for financing. You should define a total budget for all departments, and then categorize them based on the costs they incur.

2. Find Company Spend Data

Unfortunately, all of your company’s spend data probably isn’t stored in one place. In some companies (but not all), each department calculates their own spending figures. Here are some places where you might find spend data:

  • Invoice processing tools
  • Financial spreadsheets
  • ERP
  • Company credit card statements

3. Centralize & Group Data as You Go

Once you’ve gathered your company’s spend data, organize it in a central document. This will give you a comprehensive report of all the departmental costs for your company. A spreadsheet is usually the simplest option.

Make sure to include details on the amounts spent, dates and times of transactions, and the names of vendors. The frequency of each expense also needs to be accounted for; is it a one-time investment or a recurring subscription?

4. Analyze the Data

Once you’ve collected the data, you can analyze it and find opportunities for improvement. For example, recurring subscriptions often account for a significant part of the budget; make sure they’re truly necessary and remove the ones that aren’t. You should also assign a working budget to each department and then ensure they follow it.

5. Use the Report to Plan for the Future

The spend report gives everyone a clear view of the company’s finances. For the leaders of the organization, it becomes much easier to make important decisions. You can also start making changes to the spending model itself, so that operations are smoother in the future.

Spend Analysis Tools

When you use the right tools for various business tasks, it’s easier for you to find and aggregate spend data for analysis. The data itself is also more reliable.

Look for spend analysis tools that automate workflows as much as possible to save time and reduce the risk of manual errors. Cloud-based tools can be accessed by employees no matter where they’re located, which is vital in an increasingly remote work culture.

Accounting Tools

Accounting tools can help you reconcile bank statements and categorize financial data. They save you the effort of producing financial reports and balancing your books. Many have customizable dashboards that give you real-time updates on your finances, so you don’t have to wait for the end of the month or quarter for insights.

Zoho Books is a powerful and popular platform that offers a full range of accounting capabilities, as well as automated workflows.

Xero is a cloud-based tool that supports unlimited users. Its many integrations make it popular for small businesses using SaaS.

Payroll Management & HR Platforms

HR management, including all the complexities of payroll, can be a significant challenge. The platform you choose should automate calculation and payment for compensation and benefits; manage employee onboarding, training, and promotions; and handle your tax obligations and compliance with employee regulations.

Because payroll doesn’t operate in a vacuum, you’ll also want a tool that integrates with and automatically exports to your accounting tools.

Paychex offers an all-in-one payroll and HR platform. It helps with employee training, tracks work hours, and handles benefits and compensation.

Papaya Global automates workforce management for global teams. It manages compensation, time tracking, and compliance, and integrates with outsourcing companies.

Enterprise Resource Planning (ERP) Systems

ERPs are the backbone of large enterprises. They manage, store, and analyze data for almost every department, including HR, finance, and operations.

ERPs help to unite and standardize data from across the organization, so they often serve as a key data resource. They also produce reports and business forecasts based on historical data, which helps with strategic decision-making.

Oracle Cloud ERP is a cloud-based, easily scalable, and intuitive system with a broad feature set, making it both powerful and easy to use.

SAP ERP is a modular ERP that’s suitable for both small businesses and large corporations. It’s cloud-based and scalable, and integrates with most other business tools.

Payment Processing Tools

A typical company has to process and track multiple payment methods, including credit and debit cards, bank transfers, cash, checks, and digital payments from online platforms and digital wallets. Payment processing tools help you stay on top of all your income, no matter the source, and unite revenue streams to provide better visibility into cash flow.

Due is a cloud-based SaaS payment processor that can handle credit cards, recurring payments, digital wallets, and more. It support small businesses and enterprise sales.

Weave Payments offers secure payment processing for both in-person and online payments using various methods.

Spend Management Tools

Spend management tools help CFOs track expenses with features like automated approval processes, documentation association (which links receipts and invoices with the right transactions), and robust reporting on all levels.

Mesh Payments allows finance teams to monitor spending across the organization, with automated controls and rich reports to increase spend visibility.

Procurify offers a user-friendly interface for approvals and expense tracking, plus useful reporting and analytics features.

Spend Analysis Best Practices

Use Detailed Spend Data Classifications

When categorizing and classifying your spend data, it’s important to go into sufficient detail. For example, you need to store line item information. If your categories are too vague or broad, you’ll end up with a mess of data that you can’t analyze properly.

Implement a Common Internal Taxonomy

In addition to—or instead of—coming up with your own taxonomy, use one that’s already accepted. For example, the United Nations Standard Products and Services Code (UNSPSC) is a common coding system for logging goods and services. It helps map data into a single schema to make category spend analysis easier.

Automate Data Processing

Gathering, cleaning, enriching, and standardizing spend data takes time and leaves room for manual errors. Data collection can easily be automated, and there are plenty of tools that use artificial intelligence and machine learning to pull data from integrated platforms and preprocess it into a single repository.

Combine External Data Sources

Your suppliers have data too, and sometimes it might be more useful than yours. Including their data helps to make your spend analysis more comprehensive, trustworthy, and effective.

Adopt a Permanent Spend Analysis Solution

Spend analysis can be frustrating and exhausting when you do it in on ad hoc basis, but the insights it offers are invaluable. Adopt fixed, standardized workflows for gathering, processing, and storing spend data, so you can easily complete regular spend analysis.

Collaborate With Other Departments

Spend analysis is more powerful when procurement collaborates with other business units. Together they can create a positive feedback loop for improving performance, and establish processes that deliver real savings for the company.

Set and Measure Category Strategies

Use spend analysis reports to develop sourcing strategies that lower risk, increase value, and make the supply chain more efficient. Set goals and review your progress regularly so that you can adjust them as needed.

Act on Spend Analysis Insights

Spend analysis insights are really only valuable if you take action accordingly. Make sure to take full advantage of any opportunities you find to optimize expenses, cut costs, raise ROI, or make purchasing processes more efficient.

Why You Should Use Spend Analysis Software

Although you might be able to manage spend analysis with your existing tools, automated spend analysis software helps streamline the process and remove friction. With dedicated spend analysis software like Mesh, you can automatically combine data from multiple locations, such as your ERP, spreadsheets, expense reports, and more.

Spend analysis tools also help unite data from different sources, like invoices, purchase orders, and financial records. Because it’s designed with spend analysis in mind, this software is more robust and powerful than generic data analytics tools.

To learn what spend analysis software can do for your business, book a demo.

The Bottom Line

Proper spend analysis allows you to optimize your business expenses. It helps you cut costs and ensure that company funds are being managed effectively. While manual spend analysis is tiring and time-consuming, spend management software can streamline the process. It will automatically organize your company spending, create insightful spend analysis reports, and give you the visibility you need to grow.

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