Spend analysis is the process of classifying and analyzing regarding a business’s expenditure in order to decrease overall procurement costs. Spend analysis, when done properly, can give businesses a clear understanding of what is affecting their spending, how they can maximize profitability over the long term, and the best approach that they can take towards budgeting and supply chain management.
Gathering and organizing spend data
Spend analysis should always begin with identifying all available sources to collect data from. This includes data from all departments and business units. Businesses should ensure that each and every source is properly accounted for to develop a clear, accurate, and comprehensive overview of their expenditure.
Next, businesses should consolidate all of this data into one common and central location. The most convenient and logical way to do this is to input all of the spend data into a database with the help of spend analysis tools. These tools can convert all data to the same format, currency, etc., ensuring consistency and making it easier to draw conclusions based on the data. These tools can also ‘cleanse’ the data that has been compiled, checking it for errors and discrepancies. Next, spend analysis tools can be used to categorize the data. This is essential to determine where and on what a business is spending its money. Direct costs and indirect costs should be properly categorized. Things like legal fees, travel, communications, and marketing should also all be categorized. Once a business can see what category they spend highest on, they can further examine the costs within the category to figure out how to boost their profits and reduce overspending.
Analyzing spend data
After the spend data sources have been identified, and the data has been collected, checked, and categorized, the next step, of course, is analysis. It is important to note that this analysis cannot be done just once—it must be continuously performed and updated as the business and business practices change. A change in suppliers, for example, must be acknowledged and accounted for in the spend data and in the database where that information is kept. Continuous spend analysis will allow businesses to identify trends and patterns in their spending habits and will allow them to make informed decisions about their financial future. This analysis can be done manually or, as is most common, via spend analysis tools and programs.
Spend analysis will allow a business to see where their money is going and helps them to identify ways to reduce their costs, re-evaluate relationships with suppliers, and ensure that they are getting the best value for their money. The ultimate goal of spend analysis is to increase a business’s profitability and reduce unnecessary spending and overspending as much as possible. Spend analysis is also helpful in improving compliance and improving supply chain management.
For all steps of spend analysis to be done effectively, businesses should ensure that their analytics teams have been properly trained in this area. Businesses need to invest in advanced spend analysis tools and software and must ensure compatibility with other software and technologies that they rely on.