In any business, it pays to keep a close eye on every dollar making its way out the door.
For startups and growing businesses, this is even more crucial. You’ll have a much harder time hitting your quarterly targets if you’re losing money to inefficient or irregular spending.
This is where spend analysis comes in. By taking a deep and detailed look at your spending, you can identify trends and patterns you wouldn’t be able to see otherwise.
Once you understand these trends, you can save your business a lot of money. Getting a handle on your spending can make all the difference for your bottom line.
In this post, we’ll take you through the basics of spend analysis for growing businesses, and will show you just how useful this process can be.
What is spend analysis?
Put simply, spend analysis involves gathering spend data from a range of sources and taking a close, detailed look. With spend analysis, you’ll be looking at the who, what, why, when and how of your organisation’s expenditure.
Done right, spend analysis improves the visibility and understanding of company spending. This is a great way to examine your past spending and proactively identify opportunities for future savings.
Running an analysis of expenditure lets you establish a baseline to measure improvements in ongoing company spending, and to identify areas where spending may be getting worse.
In case none of that made much sense, here's a quick video from the folks at Procurement Academy that may help:
|Want a detailed 6-step spend analysis plan? Here's what you need!|
Let’s take a closer look at some of the benefits of spend analysis.
Why do spend analysis?
A thorough analysis of company spending can be a time-consuming and absorbing task. Fortunately, the benefits of this analysis far outweigh the effort involved.
Understanding how your company spends money at a global level helps you make smarter and more efficient purchasing decisions. The more you know about where your money is going - and why - the better your chance of keeping expenditure under control.
Looking closely at past spending information can also help you improve your processes. For example, spend analysis may indicate that your thresholds for executive approval are too low, and your senior managers are spending too much time approving minor purchases. Correcting this can free your people up to do better things.
Spend analysis can also identify opportunities for significant savings. For example, you may not realize you’re missing out on early payment discounts, or that suppliers are charging you late penalties due to inefficiencies in your processes.
Finally, this analysis can help you stay compliant with legal or accounting requirements. For example, if you work for a government department, spend analysis can help make sure you’re complying with the requirement to source a minimum number of supplier quotes before progressing with procurement.
So, we’re clear on the benefits of spend analysis. But how exactly do you go about it?
How to approach your spend analysis
In general, spend analysis should involve the following seven steps:
- Identify the sources of spending
- Assemble the relevant information
- Tidy your data
- Link your suppliers
- Catalogue and sort your payments
- Analyse your data
- Do it all again
Let’s examine each of these steps in detail.
1. Identify the sources of spending
First, you need to identify all the sources of your spending data, from all relevant departments and business units.
Think about where you can find dependable records of your company spending. Which tools do you use to track spending, and which of your teams are most likely to spend company funds on a regular basis?
Once you’ve identified each of these sources, you can start to assemble your spending information.
2. Assemble the relevant information
Now, you need to pull information from all these sources into one central database.
This can be a time-consuming and difficult process, particularly if - as is the case with some businesses - your information is stored in different formats and in different places.
This process is a lot more straightforward if you work with modern, integrated accounting software - and if your team is using it as intended.
Be sure to keep a clear record of any gaps in spending knowledge. Can you easily find the answers and information you need, or do you have to go looking for things?
If you’re having a hard time finding information, this may be a sign of wider issues. At the minimum, you may need to improve your systems or your staff training. Worse, you may have an issue with deliberate or unintentional expense fraud.
Once everything is in place, get ready to roll up your sleeves...
3. Tidy your data
An accurate spend analysis needs clean data. You need to take a look at the data you’ve assembled, tidy up anything that isn’t correct, and track down any other documents you need to make it complete.
This step of the process is often where key lessons emerge, so be patient and methodical. More often than not, incomplete or inaccurate data can be a red flag pointing to wider issues.
Once you’re confident your spending data is in a good state, you can start to group information together.
4. Link your suppliers
To better manage your information, you should link your supplier data together. If you process a range of payments to suppliers under a number of different names, you’ll need to group these together for better analysis.
Once you do this, you’ll start to see trends in spending totals over time. For example, you may find peaks and plateaus in supplier payments reflecting the different stages in your production process.
Next, you can start to break your payments down into even more useful units.
5. Catalogue and sort your payments
At this stage, you’ll be ready to group payments based on the major types of expenditure your business faces.
For example, you can group payments within the categories of marketing, travel, office supplies, legal, location costs, and production, among others.
When done well, this kind of cataloguing can give you a clear and accurate picture of where your money is going. By sorting your payments and tracking them over time, you can start to establish a baseline for future performance.
The key to getting a clear picture? Robust analysis.
6. Analyse your data
Once all your expenditure data is in the right place, you’ll be able to analyse your company’s spending culture in detail.
This kind of overview can tell you which teams are spending the most, and whether company expenditure is particularly high in certain places. For example, you’ll now be able to look across your different sales teams and be clear about how their spending measures up.
Analysing your expenditure data can help you identify specific spending issues, such as:
- Invoice overpayment: You may have paid too much for particular invoices, or even paid them more than once. Trust us, it happens!
- Currency conversion: You could be getting stung with conversion fees for expenses in certain currencies, particularly if you’re dealing with international suppliers.
- Fraudulent spending: This analysis may be the first opportunity to look at the legitimacy of certain expenses, and whether there are any unexplained costs.
- Overdue system improvements: Spend analysis can highlight where your systems need work, particularly around retaining clear and reliable expense information.
This analysis requires time, effort, and above all, capable people. If you don’t have this kind of in-house capability, consider getting outside help from a qualified advisor.
7. Do it all again
Spend analysis is much too useful to simply be a one-off process. Instead, you should plan to do it on a regular basis.
Repeating this analysis over time will not only make sure any issues are identified promptly, but will also allow you and your finance team to keep track of patterns on a long-term basis.
By making this analysis a regular activity, you can broaden your understanding of your business’s expenses, and can resolve any spending issues quickly and proactively.
You’ve completed your spend analysis - now what?
Once you’ve completed your spend analysis, you need to consider the key findings and the changes needed to address these.
For example, your analysis may highlight spending irregularities in certain teams or within certain cost categories. More broadly, this analysis may suggest major issues in spending practices that require a fundamental change in company culture.
Whatever you need to do, be sure to involve the right teams at the right stages. For example, if your broader spending processes need updating, you’ll need to involve your finance team, as well as your executive management.
To finish up, let’s take a look at one way to make your spend analysis that much smoother.
Make your spend analysis a little easier
Spend analysis can be a daunting process. But it's also essential to ensuring successful spend management for your company.
Collecting the data, taking a hard look at your supplier information, confronting your processes: it isn’t a job for the faint of heart.
To give yourself the best chance at success, consider switching to an integrated expense management system like Spendesk.
By giving you real-time oversight of your business expenses, Spendesk not only helps prevent the risk of spending irregularities, but also makes it easier to run an in-depth analysis of your spending.
With Spendesk, you can automate a lot of time-consuming expense management processes. This makes your spending more secure, giving you and your team more time to spend on the fun stuff - like growing your business.
If you’re thinking about your spend analysis, be sure to take a look at what Spendesk can do for you.