Spend analysis 101: A complete guide to getting started

Does it ever feel like money is flowing like water through your business, slippery and hard to grasp? Without the right tools, it can be just like that. But it doesn’t have to be that way. Spend analysis is a grip, offering organizations a deeper understanding of their financial whereabouts. It's not just about watching where the dollars go; it's about understanding the underlying patterns and the opportunities they reveal for your business.

Cost and spend analysis are often found in similar circles, yet they’re not quite the same. Distinguishing the two is the first step to mastering managing your company's expenditures. Knowing when to implement cost-cutting measures or when to engage in strategic spending can be pivotal.

In this guide, we’ll look at all that’s involved with spend analysis, from the basics to the benefits and the challenges of it all. Let’s dive in.

What is spend analysis?

Spend analysis is a process that helps businesses understand where their money is going. By examining financial data in a systematic way, organizations can identify patterns in their spending habits, pinpoint areas where they can negotiate better deals, and locate potential savings. 

The essence of spend analysis is in its ability to provide spend visibility. And visibility is critical for organizations because it helps you make informed business decisions by revealing the details of procurement activities. 

It is usually happens in stages, like this: 

1. Gathering data from all sources of spend

2. Cleaning up the data to ensure accuracy

3. Categorizing the expenses to understand the nature of spend

4. Analyzing the data to uncover actionable insights

What is the difference between cost analysis and spend analysis?

Cost analysis and spend analysis are two distinct financial assessments that organizations use to improve efficiency and save money, but they focus on different aspects of financial management. 

Cost analysis is a more micro approach that evaluates the costs associated with individual products or services. It considers factors like labor, materials, manufacturing processes, and overhead to identify opportunities to reduce costs without compromising quality or performance.

On the other hand, spend analysis takes a macro view, examining the company's overall spending patterns across various categories. This includes things like analyzing expenses incurred from suppliers, purchasing operations, and procurement practices. It provides a thorough understanding of how an organization's money is being spent. 

Both cost and spend analyses are super important when it comes to cost optimization and strategic financial decision-making. Spend analysis provides spend visibility and insights at a high level, while cost analysis digs deeper into the expenses related to specific goods or services.

How to do spend analysis in 6 steps

Step 1: Identify data sources

Locate and compile relevant data from various sources such as enterprise resource planning (ERP) tools, procurement databases, and financial systems. Be sure the data is accurate, complete, and up-to-date. This step lays the foundation for the entire spend analysis process.

Step 2: Cleanse and normalize data

What does it mean to “cleanse” data? It means removing any duplicate or inaccurate entries, standardizing data formats, and consolidating information from different sources. It’s like editing, but for numbers. 

This step is necessary to ensure data consistency and accuracy during the analysis. It’s what we call “preaccounting” at Expensify, where all your financial data is cleaned up and centralized so it can move on to the next stage of categorization. 

Step 3: Categorize expenditure

Your categorization structure should be in line with your organization's specific needs and goals. It should allow for meaningful analysis by grouping expenses into relevant categories like supplier, department, or product/service. 

When creating any category for spend analysis, picture a tree with branches for all the different levels of classification. With so many potential categories for any business, that’s a lot of financial “branches!” But by using an expense management software like Expensify, categorizing your business expenditures becomes streamlined and even integrates with your accounting software. 

Step 4: Analyze spending patterns

Once data is cleansed and categorized, use the spend analytics to perform a thorough analysis of spending patterns. This involves finding the trends, patterns, and anomalies in spending across different categories. It helps to identify areas of overspending, potential savings opportunities, and areas where procurement practices can be improved. This is the step where you create spend analysis reports.

And whatever you do, don’t do it manually! Use a tool like Expensify’s expense reporting software, which improves efficiency, streamlines the reimbursement process for employees, and gives you better visibility. 

Step 5: Identify cost-saving opportunities

Based on the results, identify specific cost-saving opportunities. This could involve renegotiating contracts with suppliers, consolidating purchases to obtain volume discounts, or exploring alternative sourcing options. The goal here is to optimize spending without sacrificing quality or performance, which is one of the benefits of spend analysis.

Step 6: Monitor and track progress

Implement a system to continuously monitor and track spending patterns and improvements over time. This allows for ongoing evaluation of cost-saving initiatives and ensures that the benefits are long-lasting. Regular reporting and data visualization also help stakeholders understand the impact of spend analysis efforts.

Consider using tools like the Expensify Card to make monitoring and tracking progress a breeze with features like controlling how much employees can spend and ensuring realtime compliance at any given moment. 

Spend analysis challenges

Small businesses often grapple with limited resources when comprehending and leveraging spend analysis. Their main challenges include data inconsistency, inefficient analytical tools, and limited expertise.

Data inconsistency

Accurate spend analysis requires consistent data. Small businesses might face disparate data sources with varying formats, which makes consolidating everything a nightmare.

Solution: Implement standardized data entry practices and invest in spend analysis software to aggregate and harmonize data.

Inadequate analytical tools

Another challenge is the lack of advanced spend analysis tools, which can be costly.

Solution: Small businesses should use cost-effective spend analysis tools tailored to their needs, especially considering scalable options as they grow. With a tool like Expensify’s expense management, all expenses are validated and properly accounted for, giving you visibility and clarity on your business expenditures. 

Limited expertise

Spend analysis requires a certain level of expertise, which small businesses may lack in the beginning.

Solution: Investing in training for in-house team members or outsourcing spend analysis tasks can bridge this gap.

Spend analysis FAQs

• How to do a spending analysis?

  To conduct a spending analysis, first, gather all relevant data on your organization's spending, including invoices, purchase orders, and supplier contracts. Next, cleanse and organize this data to ensure accuracy and consistency. Then, categorize and classify the spending data into different categories, such as by supplier or expense type.

  Utilize advanced analytical tools or software to analyze the data and identify patterns, trends, and potential cost-saving opportunities. And finally, create comprehensive reports and dashboards to present the findings and continuously monitor spending for future management.

• What is spend analysis used for?

  Spend analysis is used to analyze and understand an organization's spending patterns, expenses, and supplier relationships. It provides valuable insights and helps businesses make data-driven decisions.

• What is an example of a spend analysis?

  An example of a spend analysis could be a retailer analyzing their spending data to determine which suppliers provide the highest-quality products at the most competitive prices. By identifying trends and patterns in their spending, they can make informed decisions about which suppliers to continue working with and negotiate better contracts to maximize their profitability.

• Why is spend analysis important?

  Spend analysis is important because it helps businesses save money by improving procurement processes and negotiation tactics, ultimately leading to cost reductions. It also enhances understanding of supplier relationships, enabling better performance and risk management.

  It provides visibility into spending, ensuring compliance and accurate budgeting, while also facilitating performance measurement and early identification of supplier-related risks, thereby supporting smooth operations.

• How do you write a spend plan?

  Writing a spend plan involves several key steps:

  1. Set clear objectives: Before you start, determine what you want to achieve with your spend plan. This could be cost reduction, increased efficiency, or improved supplier relationships.

  2. Gather and analyze data: Collect all relevant spending data from different sources, such as purchase orders, invoices, and contracts. Clean and consolidate the data to ensure accuracy. Analyze the data to identify spending patterns, trends, and opportunities for improvement.

  3. Categorize your spend: Group your spending into meaningful categories, such as goods, services, or indirect spend. This will help you understand where your money is going and identify areas for potential savings.

  4. Identify key metrics: Define metrics that will help you measure the success of your spend plan. This could include cost savings, supplier performance, or procurement cycle time.

  5. Set targets and action plans: Based on your analysis, set specific targets for each category or supplier. Develop action plans that outline the steps you will take to achieve these targets, like renegotiating contracts, implementing new sourcing strategies, or consolidating suppliers.

  6. Implement and monitor: Put your spend plan into action and monitor its progress regularly. This could involve tracking spending against targets, reviewing supplier performance, and evaluating the impact of your action plans. Adjust as needed, based on the results and feedback.

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