Any business owner can attest to how important it is to track expenses. It’s not just to shed light on what the expenses are, but on where and how to best spend money. This information can then be used to make budgets, set goals and milestones and ensure the company stays on track. But to get to this point it’s necessary to do a spend analysis. While the words “spend analysis” may sound like buzzwords, in reality, it’s a simple concept that can be applied across any industry.
Here we’ll take a look at what a spend analysis is, why it’s important, the essential techniques and the strategies to embrace. By the time you’re finished with this guide, you’ll be able to consider yourself an expert in all things spend analysis-related.
What Does a Spend Analysis Mean?
Before you can start to put a spend analysis into practice, you’ll need to get a firm grip on what it is. A spend analysis requires a business to look closely at its historical spending and current spending to reduce costs, improve supplier relationships, improve sourcing, and boost efficiency wherever possible. It’s a tall task, but one that a spend analysis can easily tackle when used properly.
To ensure that your spending analysis is complete and accurate, taking into account all the important information, there are a few elements that are required. You’ll need to follow the following steps:
- Data collection
- Data cleansing
- Data collection
- Data analysis
This information is compiled so that a business can determine where the money is being spent and who it is being spent with. What you may not realise a spend analysis can also answer questions like are there are any better procurement options and is the company getting value for its money. You can start to get a sense of just how important the information is to glean, and how it can help to set the direction of the company both now and in the future.
A few other key questions to ask during the spending analysis are:
- Is there a way to better the supplier relationship?
- Where is my spend growing across the organisation?
- How is my supplier mix developing? Is my spend becoming more or less fragmented?
- How many suppliers is my organisation engaging with? How many invoices are we processing each day?
It’s an in-depth process that can shed a lot of light on how the company is handling finances.
Breaking It Down Further – The Importance of a Spend Analysis in a Company
Taking that concept of what a spend analysis is, you can then break it down further into the key reasons it’s important. It doesn’t matter what kind of business it is, or the industry, the reasons remain the same.
A spend analysis helps with:
- Cost Reduction
- Improved efficiency
- Risk management
- Enhanced supplier relationships
- Strategic decision making
Some of these reasons have been touched upon in the explanation, but this is a chance to examine them further. No single reason is more important than the other, as they should all work in harmony helping to provide insight into whether the company is experiencing successful or challenging times.
Let’s examine each one at length:
Knowing where your money is being spent, who it’s going to be, and what you’re getting for it will identify strengths and weaknesses. There are bound to be areas where the business is in fact over or under-spending, giving you a chance to tweak things and then track the results. Remember, it may take a little trial and error to get things right, which is why tracking is important.
Sometimes it’s not evident how a cost analysis will end up improving efficiency but remember what’s involved in the process. There is an in-depth collection of data looking at all aspects of the business, including current processes and practices. The analysis can end up highlighting redundancies, outdated practices or duplicated steps. Each of these will slow down efficiency, which leads to higher costs for the company.
Part of owning a business is accepting there are risks. No industry or company is immune to it, sometimes you need to walk out on the edge, have faith and then take the leap. But accepting there will be risks involved in owning a business doesn’t mean you need to seek them out. Instead, it’s about healthy risk management. This means knowing when the risk is worth it, when the rewards are worth it, and when it’s better not to leap.
There’s no better way to determine the level and type of risk than through a spending analysis.
Enhanced Supplier Relationships:
Because a business can’t operate on its own without outside relationships, you need to be sure that it’s a win-win for both parties. In this case, we’re looking specifically at the supplier relationship you have.
Both you and the supplier needs to be getting something out of the deal, which means neither party is being taken advantage of. You need to know that you’re getting what you want and need from a financial standpoint, and through a spending analysis, you may determine things aren’t working in your favour.
Strategic Decision Making:
Discussed through each of these steps, whenever you collect and then analyse data you are allowed to make better, smarter and more strategic decisions. Decision-making tends to be most successful when you have the complete picture – meaning you have all the details at your fingertips. This is the best way to weigh options and act upon the data.
How to Perform a Spend Analysis – A Step-by-Step Guide
Now that you’re convinced a spending analysis makes sense for your business, it’s time to lay out the necessary steps. How do you go from concept to concrete and information?
Experts often suggest the following steps in this order:
Step 1: Identify and Collect Spend Data –
This particular step often ends up being the most time-consuming. You not only need to figure out what is the pertinent information but how you collect it efficiently. Be mindful that the data you need may be in various areas of the business, so this can require a lot of thought and planning.
Don’t worry about watering down the data too much at this stage, you’ll use a fine toothcomb later on in the analysis.
Step 2: Cleanse and Normalise Spend Data –
Here is where you’ll be looking at the data more closely to determine what is truly needed, and what doesn’t need to be used in the analysis. Cleaning up the data means you’ll be narrowing your field of vision. And when it comes to cleaning up the data, it’s not just about determining what’s necessary and what’s not – it’s also about removing duplicate entries, adding or removing fields, changing up the order, and so forth.
It will be well worth your time to go about this step thoroughly.
Step 3: Categorise Spend Data –
Now that you’ve got all the necessary and cleaned-up data, you can go ahead and categorise it. Doing so makes the analysis easier. It’s normal to feel a bit overwhelmed with this step, especially if you’ve got a lot of data to categorise.
Step 4: Analyse Spend Data –
It’s hard to put into words how to analyse the data, but simply put it’s about taking all the information in front of you and weighing the various pros and cons on a macro level. On a more micro level, you are analysing each particular step and spend, evaluating whether value for money is being achieved and critically, gaining visibility of your spend in various areas to drive potential savings opportunities.
Step 5: Implement Action Based on Analysis –
Of course a cost analysis is only worthwhile if you plan on implementing measures that have been determined necessary. All that in-depth analysis is bound to point out where weaknesses lie and where cost savings can be found, not to mention things like bettering efficiency and supplier relationships. Once you go ahead and implement those actions, that’s when the ROI will also improve.
The Key Tools – Taking a Look at the Spend Analysis Tools You Can Use
Because a cost analysis can be so time-consuming and involved, it makes sense to explore automated tools. Businesses use automated tools every day, such as dedicated software and apps to do specific jobs and tasks. But does it make sense for a spend analysis?
In looking at manual vs. automated tools, often it comes down to how much data you need to collect and analyse, and what your timeline and expectations are. No question that automated tools speed up the process, but they aren’t always customisable, which gives manual tools the upper hand. It’s hard to say which is better, as each has a list of pros and cons.
Generally speaking, however, the bigger the company, the more complex the operations are, and the more data that needs to be collected – the more the business can benefit from automated tools. For companies that are also on a tight budget and can’t dedicate much people power to data collection, cleaning and analysing, once again automated tools make sense.
If you’re leaning towards using automated spend analysis software, some of the most popular options include:
- Anvil Analytical
- SAP Ariba
This is far from an exhaustive list, these are just some of the hottest and most useful spend analysis software in 2023. When choosing which software to purchase, factor in such things as user-friendliness, whether it’s customisable, whether it meets your needs now and if you expand and grow your business.
Overcoming Common Challenges in Spend Analysis
Proceeding with a spend analysis may be the best decision your company can make, but that doesn’t mean all is well with the road ahead. Challenges and obstacles can throw you off-course so you need to be aware of the potential issues, how to spot them, and how to overcome them.
A few of the most common challenges that companies can face while doing a spend analysis include:
- Data quality issues
- A lack of resources
- Lack of standardisation in the company
It would be great if there was a one-size solution for each of these challenges, but that’s rarely the case. When it comes to data quality, this is a deeper issue that the company at large should be on a journey to remedy. Ensuring that all data is current, complete, and accurate is useful in all regards of business planning. This can take some time to remedy, which means the spend analysis may need to be placed on a temporary hold.
As for a lack of resources, if you can’t dedicate people’s power to the task – rely on software that can automate much of the process. Just be sure that the people using the software are well-trained and understand their responsibilities.
Then there is the lack of standardisation in the company. This is a top-down issue, which means until a change is made at the top and standard processes are outlined and put in place, this will continue to pose a challenge.
Benefits of Spend Analysis: A Closer Look
Still not convinced that a spend analysis is completely necessary for your company? Here’s the thing, no company is unique when it comes to the benefits. Business owners are always striving to be more, do more, cut costs, and make more money.
A spend analysis can successfully address cost savings, and process optimisation, can help with compliance regulations and even give you a stronger position when it comes to negotiating terms with suppliers. Maybe you operate a small to medium-sized business and feel there’s no need for this kind of in-depth analysis, when in reality it can be even more important to small companies with tight budgets and limited resources.
Future of Spend Analysis
And while on the topic of spend analysis, it makes sense to embrace it now as more and more companies embrace machine learning and AI. These can transform the way you go about business, including how you conduct a spend analysis. Imagine a day where it’s automated in that you don’t need to do a thing, and you don’t even need people to operate the software. No one knows just how far AI can go, and the benefits it can offer, it’s pretty much the wild west out there.
But even with those uncertainties, with businesses constantly looking to increase productivity and efficiency without having to spend more money, it makes things such as a spend analysis vital. Emerging technologies will recognise and then address this trend, helping to shape the way spend analysis proceeds.
It’s Time to Get Serious About a Spend Analysis for Your Business
There’s no beating around the bush here, as this guide shows it’s incredibly important for business owners to perform a spend analysis so they get a bigger and more in-depth view of what’s happening in their company. It’s imperative for such things as improving efficiency, cutting costs and perfecting your risk management skills.
Because a spend analysis looks at so much data and really takes each component and examines it closely, it’s not a process you want to rush. It’s all about following the ideal steps, in the right order to ensure that the data you collect is current and accurate and will shed much-needed light on costs. If you’ve been concerned about ballooning costs, streamlining processes and making sure the business gets the ROI possible, there’s no way around a spend analysis. It needs to be done so your business can be successful.
If you’re interested in learning more about spend analytics, its uses and benefits, be sure to contact us here at Anvil Analytical. As a leading procurement software firm, we can offer all kinds of valuable insight and tools that will help your business to reach its goals.