Most business leaders have a fair idea of where their money goes. You know essentially how much they spend on salaries, rent and utilities. You probably also think they know which software their teams use, and how much the company spends on coffee.
But in reality, you likely only have part of the picture.
Spend analysis makes all of this crystal clear. You walk away with both a big-picture ratio for how much the company spends on tools, travel and food, as well as precise action items and specific costs to cut.
In this article, we’re going to see how this works in six steps. Plus, we’ll give you a smarter plan so you can skip all the slow stuff in future.
What is spend analysis?
Spend analysis “creates an understanding of the organisation’s spend structure and enables actions to be based on facts rather than intuition.” In other words, spend analysis shows you what’s actually happening with your company’s cash.
But just knowing how your company spends isn’t really the point. You need to find actionable insights and make changes.
These can include unidentified payments that nobody knew were happening, redundancies and double-ups, and specific suppliers who might be open to re-negotiation.
The result should be a report with your recommendations, ready for the appropriate people to take action.
What do you want to achieve?
Before you dive in headfirst, it’s important to figure out what spend analysis means to you. Not every business has the same money worries, but there are still valid grounds for doing this work.
There are a few main reasons for doing spend analysis for your business:
- To have more precise financial and annual reports
- To find opportunities to cut costs
- To create accurate spend forecasts
- To spot fraudulent or unacceptable spending
- To manage risk and diversify vendors
If you happen to have others on top of these, that’s great as well. We’ll talk about setting clear goals in a moment, but it’s important to have something more concrete than simply “to know what’s going on.” Although that can’t hurt.
If you’re clear on your reason for being here, let’s get into the strategy itself.
How to do spend analysis in six steps
That’s the background info out of the way, so let’s get into strategy. This spend analysis process is relatively simple, but it will take time. There’s lots to figure out and data mapping to do, so don’t expect it to happen in an afternoon.
The good news is that, once you’ve done it the first time, it should be far simpler moving forward.
Note: We’re about to go through the “classic” spend analysis structure. This is what to do if you’ve never done this before, and you’re not sure where to start.
Of course, there’s a simpler way to do all this. A proper spend management system will keep all of your data in one place, and you’ll have real-time spend analysis whenever you need it.
But until that time, here’s what you have to do.
Step 1. Set your goals
We’ve already identified several key goals of spend analysis. So what do you hope to get out of this for your business?
The big, overarching goal should be visibility. You need to be able to see who’s spending what at work, and why.
At present, you probably have this information somewhere. But if you have to wade through endless spreadsheets or did deep into databases every time you need it, that’s not a workable solution in the long term.
You should finish this exercise with the following data points at the very least:
- Which business teams spend, and how much
- Which vendors your business spends the most with
- Your general categories for expenses, in order of total spend
And then comes the analysis. Depending on your specific goals, you’ll want to identify recurring costs that aren’t useful, ways to save the company money in the long term, and potentially even fraud or impropriety.
Step 2. Find out where your spend data lives
Once you’ve set out what you hope to achieve, the next step is discovery. That means figuring out how to get your hands on that data you need.
In most companies, financial data isn’t as centralised as you’d hope. Certain teams track their own budgets (or worse, they don’t!), and money seems to fly out of the company account without a lot of oversight.
So in order to conduct spend analysis, you first have to figure out where this information lives.
Where you might find data
It’ll depend on how you’ve structured company spending. But for most companies, spending data can be found in a few areas:
- Procurement tools
- Company credit cards and the bank accounts associated
- Invoice processing
- Payroll tools
- Your ERP
- Other finance spreadsheets and documents
There’s no quick fix for this issue. You’ll simply have to investigate. But the nice part about this effort is that once it’s done, you should have a much clearer picture than before. And you’ll have the ammunition you need to seriously consider one centralised spending platform to keep all this data in one place.
Step 3. Pull everything together
Now that you know where the data is, it’s time to gather it in one place. You need some sort of database (or Excel sheet) with all of your company spending, including business teams, vendor names, and anything else you’ve set out to identify.
It’s a slow and sometimes tedious process, but you need to have one source of truth to accurately analyse spend. So there’s really no way around it.
This is, however, the perfect opportunity to implement a single source of spending truth moving forward. Find one tool or database that works will all your various payment methods, so that you always have up-to-date information the moment you need it.
Clean as you go
During this process, you’ll also notice if certain data points don’t look right. And even if they’re correct, they may not be uniform.
This data may be in a mix of:
Something simple like timezones can actually complicate spend analysis quite significantly. If you want to check spending month over month, you need to know exactly when the month begins and ends for your business. And unfortunately, the month doesn’t end at the exact same time in different countries.
As you compile your spend data, set clear rules and expectations for these kinds of issues, so that your analysis is consistent every time you complete it.
Step 4. Categorise and group spending
The next step is to group spending together so that you’re able to easily analyse it. You’ll need different tabs or columns in your database for each of the following:
- Business team
- Supplier/vendor name
- Spend category (for instance travel, agency fees, or food & drink)
- Frequency (one-off, monthly, or annual will usually suffice)
Plus any other key categories you need.
You may already have categorised spending in your data sources. For instance, most ERPs and procurement tools let you assign a label.
If these are high-level and clear enough, you can likely keep them. But you may need to change these labels in order to end up with a relatively small, clear set of categories.
You definitely don’t want a mash-up of ad hoc spend categories. This will make your analysis virtually impossible.
Step 5. Analyse!
Your data is clean, categorised, and accessible. So now’s the time to actually figure out what it can tell you.
As always, your specific analysis will depend on the goals you set above. But let’s assume that you’re looking for areas to reduce spend - most businesses are.
Here are a few areas ripe for optimisation:
Here’s a simple fact about most modern companies: they have a tonne of ongoing subscription payments, and nobody truly knows how many there are. That’s because each subscription is usually managed by an individual team, and they can’t see what the other teams use.
Once you have all of these subscriptions in one place, it’s usually pretty easy to spot reduncies. Do you have subscriptions to Trello, Asana, and Notion? Does the sales team use Salesforce, Close, and Accent?
There might be good reasons for all of these tools. But more likely, new platforms were added without anyone cancelling the old ones. Something to look into.
The other side of the subscription coin concerns payments that are about to renew. Again, if you have redundancies, you definitely want to get rid of these before renewing for another year.
But for the ones you’re keeping, you still want to prepare probably for renewal time. These conversations are likely handled by team managers who aren’t experts in price negotiations, and who ultimately aren’t worried if the company spends more than it should.
Make sure that team leaders know that renewals are approaching, and help them find ways to build a better deal.
Large one-off payments
These don’t come around often, but when they do they can be painful. A large tax bill or hefty legal fees can represent a significant percentage of your company’s spend.
The people concerned - C-Suite executives and specific managers - will already know about these costly affairs. But it’s important to highlight them in your spend analysis.
You may be able to build a business case for more tax or compliance training to avoid the next shock.
This category can drive business owners insane. When you actually look closely at how much you’ve spent on organic tea blends or in-office pilates, you may need to slap yourself.
The first step is to have all these payments categorised. In fact, you did that in Step 4 above. Then you need to assess what percentage of total spending went to incidentals. If it’s higher than you’d like (and it almost always is), then it’s time to dig deeper.
In the end, it may be that the company spends exactly as much on tea and pilates as management would like. It’s your job to at least highlight these potential trouble areas and put them into your spend report.
Of course, there are almost endless ways to conduct your own spend analysis. These are just a few examples.
But the vital next step is to make sure that this information makes its way to the people who need it.
Step 6. Report back
Once the analysis is over, it’s probably time to make changes. And chances are, if you’re conducting spend analysis yourself, you aren’t in a position to make every change you want to. That’s going to fall on team leaders and senior management.
So your responsibility is to build a clear, concise, and actionable report for others to use.
This could be a live custom presentation for all those important stakeholders, or a shareable document for them to read in their own time.
But the most important part is that it deals with individual issues individually. If you want the sales manager to get rid of two of those subscriptions, you’ll have to spell it out. If there are notable renewals coming up, make sure the people concerned are aware.
And most importantly, spell out the changes that you want to see in the future. Now’s the time to set up better processes for the long term.
Bonus: Spend analysis tips
Those were our six steps for easy spend analysis. On top of these, there are a few good rules of thumb to follow, as set out by other experts.
The clever team at Caliba offer this structured approach to categorising spend:
"A spend cube is a unique way of taking a look at spend data in three dimensions: by suppliers, by business unit and by category of item or service. The 3 axes represent category (what are we buying), the business user or cost centre (who are we buying it for), and supplier (who are we buying it from). It allows you to 'slice and dice' the data and view it from a variety of angles."
One big benefit of successful spend analysis is knowing which vendors are beneficial, and which only hurt your business. And of course, you need to be willing to move on from suppliers who consistently fail to meet expectations.
"If you don’t give enough time and haven’t thought through who should be your vendor, you may end up spending more money than intended or saving less than you could. Many a time, a vendor may promise you the lowest cost, but later you realize there are many hidden overheads not highlighted in the contract."
Especially if you do a lot of purchasing and procurement, invoices can be difficult to manage. You have so many, and they seem to fly in from everywhere.
Tradogram suggests instituting firm rules about how and where invoices are submitted:
"Establishing a single point of entry for invoices is a great idea for attaining lean organisation, for a few reasons:
- It allows a single designated processing party to reconcile received invoices against their respective purchase orders quickly, allowing for faster supplier payments.
- It improves internal control when a 3-way match is verified before passing details on to accounts payable, because provided information won’t need to be updated due to inaccuracies.
- It provides a safeguard against fraud by confirming that orders were actually placed for the invoices that are being received."
Simple and uniform processes for everything spend-related always save time and reduce errors in the long run.
Many companies chug along with insufficient or poorly collated spend data, just making do. But as Cloudia explains, using dodgy data as the basis for your spend analysis can be costly:
"The chances for mistake are especially high if you still conduct your spend analysis in Excel or infrequently done manual spend cubes. Rarely can you make good decisions based on bad data."
The message? Remove human error wherever possible, usually through automation.
Automate the tedious parts of spend analysis
We dedicated three steps in the above process to manual work that won’t add a lot of value. Finding data, cleaning and categorising it takes a lot of time. And that’s just to get you to the point where you can analyse company spending.
The real problem here is that your spending itself isn’t centralised. You have different team members spending in different ways, and none of these payment methods work hand-in-hand.
So how do you fix this (and kill all that data entry)? You want a spend management platform that pulls all this spending together in one place.
Ideally, that platform also includes the payment methods themselves. For instance, Spendesk gives you prepaid physical cards to spend in-person, virtual cards to pay online, and processing tools to handle invoices. All of that spending goes through the platform, so you always know what’s being spent and where.
Once you have that data available, you can do spend analysis anytime you want. You just open up Spendesk and see what’s happening. Which gives you far more time for the actual analysis itself, and let’s you ensure that the business spends money the way it should.