What is spend analysis and how to conduct it in 7 steps?
When you're going through your quarterly or year-end profit reports and see that the final numbers on the sheet are way lower than your initial targets. You only get two guesses to know the cause behind this. Your first guess for this anomaly would be a calculation error. But the accounting team has done a stellar job and the ledgers are crystal clear.
Your second guess is more likely to be embezzlement. You run these numbers through a fine-toothed comb. Still, no change. The numbers stand firm and the team loyalty is higher than ever. Then what’s the answer? It’s guess number three - Inadequate spend analysis. While focusing on optimizing revenue channels that make you money while you sleep, you must also look at your spending to eliminate those processes that cost you money as well as your sleep.
By identifying all expense categories and collecting expenditure data, one can improve efficiency by reducing procurement costs and enforcing financial control. This process is known as spend analysis. It is an indispensable part of maintaining your business’s overall financial hygiene.
From maintaining adequate cash flow to formulating effective budgets, and bringing about transparency to our spending, whether through consolidating duplicate apps or removing unnecessary subscriptions, spend analysis management can create a benchmark against which spending habits are scrutinized. Spend analysis can look like a daunting process as a whole, especially when you are doing the financial pruning for the entire company. But breaking it down into easy, actionable steps can put you on the right track.
To conduct an effective spend analysis, you must first determine the exact goals for the process. Really think about what you want to achieve from applying these methods. The universal goal is visibility i.e. the ability to see the who, what, when, why, and how of every expense made via company money.
The data is usually available for us to access, but it is stored in such a haphazard manner, that it becomes almost impossible to have a starting point to these spend analysis methods. Therefore it is crucial that you list out the kind of data you want to retrieve from the chaotic horde of spreadsheets and folders.
Now that you have a fair idea of the data you want to collect, it is time to figure out places where the data exists. The number one problem in this process is the lack of data hygiene. Data isn’t organized or stored in a centralized location that is accessible to whoever needs it. Some departments manage their budgets and expense reports, some don’t. This can easily end up in money being leached off of your company by unnecessary purchases and routine subscriptions. To find this data, you might have to look at various places.
They might be procurement tools, invoice processing systems, spreadsheets, payroll, company credit cards, business bank account transactions, and lots more. This process might be time-consuming, especially when you do not have a centralized database to streamline the accounts payable process. Once the data is identified, the next steps become relatively easier.
It’s time to turn confusion into clarity! Sort out the data you’ve gathered onto one database so that there is one singular platform to access all your expenses. This would be a great time to find a single spend analysis software that brings together all your spend data to one location and acts as your north star for any spend analysis in the future.
Remember to invest in an automated spend analysis platform that assimilates all your data and keeps your spend history up-to-date. This data might be available to you in different currencies, timezones, and formats, so ensure that you have clarity of action if and when these issues arise.
The only thing as important as your spending data is your supplier data. Having a list of all your suppliers handy is a neat way to organize payments to the respective vendor. Doing this will have a twofold effect. First, it will help you see the frequency with which you pay your vendors.
This is particularly helpful if you have international suppliers, where frequent payment can lead to unnecessary FX charges, and therefore you can club these payments to save yourself money. Second, an organized supplier list with total spending will also establish a purchasing trend for each vendor. You can clearly determine quarters of peak orders and adjust your costs accordingly.
The next step after creating a supplier list is to categorize the expenses as per their expense categories for easier analysis. You might need tabs, columns, or different sheets or pages in the database you choose to store this data categorically. You can do this by marking down departments, spending categories such as travel, meals, office supplies, etc., or based on payment frequency one-time, monthly, annual, etc..
Now you posses a clear, organized, and accessible database of spend data that is now ready to be analyzed. The spend analysis might defer according to your goals. However, if one of your goals is to reduce unnecessary expenses, here are a few key things to consider:
Wasteful subscriptions: Subscriptions can be wasteful in two ways. Either you or your employees have subscribed to services that do not serve the purpose wholly or partially, or you are unknowingly paying for duplicate apps used in different departments that serve the same purpose. Both of these types of subscriptions are extremely wasteful and slowly burning a hole in your company’s pockets.
Costly renewals: Did you know that some SaaS-based platforms offer bulk or enterprise-level discounts for companies of varying sizes? Since your team managers are usually responsible for their teams, they do not take advantage of these cost-effective options and rob you of these opportunities. Therefore, seek out these platforms and keep your team leaders up-to-date regarding the renewal date. That way, the managers can negotiate a better deal before the renewal cycle for the new month begins.
Large one-time payments: Payments like taxes and other important fees can make a nice dent in your cash flow if not prepared for in advance. Doing an end-to-end spend analysis can inform the high-level executives regarding these big expenses and make budgets accordingly.
Miscellaneous expenses: If you have been casually ignoring the snack stock maintenance in your office kitchen, then it’s high time you start paying attention. Snacks for your whole team alone can cost you a couple of hundred dollars every week, thereby costing you thousands of dollars every year! Other miscellaneous spends need to be reported and their relevance questioned in your spend analysis reports.
The best part about the entire spend analysis process is the sheer knowledge it imparts regarding a company’s spending patterns, trends, and highlights cost-saving areas. For this reason alone, spend analysis should not be a one-time process. The database has to be constantly updated, the spending trends have to be analyzed regularly to ensure no oversight and 100% transparency in the process. Doing so regularly can optimize your business spending, reduce cash outflow, and retain higher profits.
However, doing so regularly manually on an outdated platform such as spreadsheets is a surefire way to end up with improper data management. So switch to automation, and you will gain better control over your indirect spending.
With Volopay spend management software, you can easily digitalize and automate your financial processes, and get your business expenses under your control, freeing your teams to do what they do best! Volopay combines approvals, corporate cards, bill payments, expense reimbursements, and accounting automation into one single platform. No more going through different tools and systems to look for purchase orders and invoices.
Your employees can use Volopay to submit a digital version of their work-related expenses which get automatically categorized, thanks to our innovative technology. Want to eliminate the reimbursement process and streamline spend analysis? Then go ahead and empower your employees with our premium physical and virtual corporate cards with built-in limits and approval workflow, so you never have to go over budget ever again.
Volopay gives you real-time visibility over all your spending on the platform with notifications for any spending made by you or your team on your card and bill payments. Stop paying for unwanted subscriptions, and see all your vendors at one place with full control over subscriptions, with insights on overspending, cost-saving ideas, duplicate subscriptions, and so on. See a comprehensive view of your spend dashboard with real-time updates.
You can set budgets for every department, employee and project. Take the guesswork out of “who paid what?” — Volopay gives you a precise picture of who, what, why, when, and how of your organization’s expenditure. You can even set these budgets as one-time or recurring based on the kind of subscription model you’ve chosen.
Volopay helps you do 3-way matching with your purchase orders, invoices and receipts so you never have to lose another spreadsheet or paper-based receipts again. Simply upload your necessary documents on a single transaction and let Volopay take care of the rest!