Spend Analysis: Definition, Benefits and How to Guide

Before implementing spend management policies and strategies within your organization, it is essential to understand the meaning of spend analysis and how to do it. Spend analysis is necessary to control costs and better manage your spend. Procurement backed by proper analysis of your company’s spend pattern can help improve your company's financial performance and help you better plan for your future.

What is spend analysis?

Spend analysis analyzes your company’s past and present spend data and identifies cost-saving opportunities. It is performed by gathering all data, cleaning up missing or duplicate data, and analyzing past and current spending to identify areas of overspending, new expenditures, or other spend optimization strategies. 

Benefits of spend analysis

Cost optimization

The most apparent benefit of spend analysis is cost optimization. Identifying areas where your company has been spending more than the industry average or discovering vendors that have started overcharging you for the same services can all be insights that help you optimize your costs by taking action. 

Visibility of spend data

Regular spending analysis also gives you complete visibility into your company’s spending data. It gives you a picture of how much each department is spending on supplies, whether spending in a particular category has increased or decreased recently, and identifies stakeholders behind a particular increase in spend. 

Better vendor relationships

Performing vendor spend analysis can also help you identify how often your vendors are paid, whether a payment policy might better suit your and your vendor's interest, etc. Having complete visibility into your spend data can also help you gain a more substantial negotiation power and help you quickly resolve any disputes.  

Reduce maverick spending

Maverick spend is a form of unjustified spend where an employee purchases goods or services outside of the set company policy. Such expenses are generally part of the tail spend of the company and are overlooked otherwise. Real-time spend analysis ensures maverick spend is kept in check. 

Understanding direct and indirect spends

To analyze spends well, you need to understand the difference between direct and indirect spends. 

Direct spend is goods or services purchased directly related to making your end product or serving your end customers.

Indirect spend refers to goods or services unrelated to the creation of the end product. 

Looking at direct and indirect is essential in the context of spend analysis. While direct spend is mainly taken care of by the company's procurement department, indirect spend is usually decentralized and should be collected and cleaned before analysis. Moreover, spend savings in the direct spend category are generally subject to strict adherence to company policies.

How to conduct spend analysis

Here are the key steps to conduct a successful spend analysis:

Define objectives

Before conducting spend analysis, it is essential to clearly set objectives for your analysis. You should have clarity on what you plan to achieve from the analysis, what are good benchmark values to target, and where your company should be financially. Performing analysis without goals can be futile and a waste of time. 

Identify data sources

Completeness of data is also essential when conducting analysis. If your data is incomplete or wrong, your analysis's results will be inaccurate. This would lead to improper planning, incorrect budgeting, and cost-cutting and harm your company’s finances. Identifying all data sources before conducting spend analysis is very important. 

Some familiar spending data sources will be your accounting software, ERP software, procurement tools, purchase orders, invoices, and other accounts payable-related databases. 

Collect and store data

If you are conducting spend analysis for the first time. Collecting all data on a single platform and carefully storing the given data in a readable format is essential. 

Cleanup of data

Data cleanup involves removing outliers, dedicating data, and filling in or removing missing data. Ensuring that your data is clean for an accurate analysis is essential. 

Categorize spend

Categorizing spend into direct and indirect spend as discussed earlier and dissecting them into further subcategories. Identifying the spend category can help you better understand your spending behavior and optimize costs. 

Set KPIs

Setting KPIs or key performance indicators for your analysis is essential before reaching conclusions. KPIs help track the success of your cost optimization measures and identify specific areas of improvement in your strategies. 

Analyze data

The next obvious step to conducting spend analysis is analyzing your spend data. This can be done to analyze spend across all predefined categories and subcategories. Spikes in the price of goods over a while, constant overspending by a particular department, and rise in indirect spending are some insights that can help you control your spending better. 

Use data to implement decisions

The final step of this process is to use the insights derived for decision-making and budgeting. Setting strict approval policies can be one such decision to combat maverick spend. The effectiveness of these strategies can be checked by looking at the KPIs and making necessary changes. 

Challenges in spend analysis

Spend analysis is a challenging task to perform. For starters, performing spend analysis requires vast bandwidth and time for collecting, cleaning, and analyzing data and might be inconsequential after all the insights are derived. Here are some common challenges with spend analysis: 

Data quality and accuracy

Tracking down incomplete, missing, or incorrect data is challenging and time-consuming. With loads of data down the line, stakeholders might not always have all the data points on hand, which can waste the analyst’s time. 

Data classification

Classifying spend data is not the same for each organization. While one company might have set classifications for their spend data, their categorization might only work for some companies, even in the same industry. Thus, setting categories for your spend data is also a challenging task. 

Improper goals and time constraints

Achievable goals for your spend analysis results set it up for failure even before beginning. Many companies set unattainable goals for a strict deadline, leading to spend analysis producing no results. 

Setting an unrealistic timeline for the spend analysis project without proper bandwidth can also lead to burnout and loss of motivation for employees. 

Lack of ongoing spend analysis

Performing spend analysis once and not continuously will lead to no change in your financial processes. Making spend analysis an ongoing process, not a one-off task, is vital to see long-term effects for your company. 

Automating spend analysis

Automating the spend analysis process can help overcome some of the above mentioned challenges. Some AP automation vendors provide real-time AP and spend dashboards categorized by spend type and vendor. Tools like ClearTech provide spend insights for a particular vendor on the invoice receive screen, allowing you to identify spend leakages before paying the invoice. With duplicate invoice checks also in place, you can optimize your spending and easily catch any overspending culprits. 

Conclusion

Analysts generally perform a spend analysis to determine patterns and insights from a company’s spend behavior. Spend analysis is of the utmost importance for optimizing your organization's costs, having complete visibility over spending going out of your company’s account, improving your vendor relationships, and reducing out-of-policy spending by your employees. Before conducting a spend analysis, it is crucial to set objectives, identify and collect data from all data sources, clean up the data, develop KPIs for the analysis, and set attainable targets. Inconsistencies in data classification, unachievable goals, strict deadlines, or lack of ongoing spend analysis can all hinder your spend analysis. Automating your company’s financial processes can reduce workload from your employee’s head and allow for easy real-time analysis, allowing you to plug leakages before the money leaves your bank account. 

FAQs

• How do you perform a spend analysis?

You can perform spend analysis by identifying and gathering data from all available data sources, cleaning up the data and filling in missing data, setting objectives and KPIs for the analysis, and analyzing the data based on the set goals.

• What is a spend analysis tool?

A spend analysis tool is software that helps you analyze your company's spending by either automating the process or storing spend data and allowing for easy dashboard creation. 

• Why is spend analysis important?

Spend analysis can help you see where your funds are going and implement strategies to improve your costs. Spend analysis can also help you control out-of-company policy expenses by employees and improve your vendor relationships. 

• What is spend analysis in strategic sourcing?

Spend analysis in strategic sourcing helps to analyze a company’s expenditure and identify areas of improvement for better cost control.