What is spend analysis? (10 steps to implement it)

In order for procurement teams to find cost saving opportunities, increase efficiency, and improve cash flow, reviewing and analyzing current and past spending is a great first step. Spend analysis can help your team learn how to manage budgets more efficiently and make informed and data-supported decisions.

Key takeaways

• Spend analysis helps companies see where their money goes, finding ways to save costs and manage budgets better.
• It categorizes spending into direct (production-related) and indirect (business operations) to optimize purchasing decisions.
• By using spend analysis, businesses gain insights to cut costs, build better supplier relationships, and ensure financial compliance.

What is spend analysis?

Spend analysis, or procurement spend analysis, refers to the process of collecting, organizing, cleaning, classifying, and analyzing your company's spend data. The goal of spend analysis is to decrease procurement costs and improve efficiencies by expanding spend visibility and transparency.

Spend analysis uses real-time data and analytics to show you the proper insights needed to make better sourcing and supplier decisions and improve your relationships with them. What's more, it also helps improve your company's financial results and cash flow.

Spend data management

Spend data management simply refers to the process by which you collect, sort, and organize your spend data. Financial software can collect spend data from multiple sources and give you access to this data through a centralized dashboard.

Spend analytics

If spend data management seeks to organize your spending data, spend analysis seeks to interpret it. Analyzing spend data means that you evaluate your current and historical spending to improve your core business operations.

How is spend data categorized?

Spend data is lumped into two primary categories: direct and indirect spending.

Direct spend

Direct spend refers to the cost of goods and services that directly contribute to the making of products. Examples of direct spend include:

• Raw materials and components used in the manufacturing process
• Packaging costs
• Equipment and machinery directly used in producing products
• Payroll devoted to your production process
• Print materials, such as instruction manuals and consumer guides

Indirect spend

Indirect spend refers broadly to the costs that are not directly linked to production. Common spending categories include:

• Marketing services, such as media buying and agency fees
• Professional services, such as the fees associated with consultants and advisors
• Utilities, including water, gas, and electricity
• Maintenance, repair, and operations (MRO)
• Information technology, including both hardware and software
• HR-related services, such as recruitment and new employee onboarding
• Transportation and fleet management
• Travel and lodging

Why is spend analysis important?

Spend analysis tools work by converting raw data into actionable and helpful information, delivering key insights into a business's procurement processes and expenditures. This uncovers opportunities to lower the costs to produce products and services.

How does a business implement spend analysis efficiently?

Step 1: Defining your spend analysis parameters

• Departments
• Periods
• Vendors
• Customer accounts
• Customer processes

Step 2: Identifying spend data sources

Spend data sources include general ledgers and financial statements, and documents.

Step 3: Identifying key performance indicators (KPIs)

KPIs vary from company to company, but common examples include:

• Spend by procurement operation
• The number of people involved per commodity
• The number of suppliers and transactions
• Transaction distribution by currency

Step 4: Identifying spending patterns

Step 5: Collecting data

Step 6: Cleansing the spend data of inaccuracies

Step 7: Categorizing data

Step 8: Identifying weaknesses or inconsistencies in supplier management

Step 9: Identifying cost reduction opportunities in the procurement process

Step 10: Creating an actionable plan targeting KPIs

Benefits of spend analysis

1. Increased spend visibility

2. Cost savings

3. Better supplier relationships

4. Ensured compliance

5. Internal benchmarks

How BILL can help

Does informed decision-making, better sourcing decisions, reduced cycle times, cost savings, strategic sourcing, and an overall improved procurement process sound like something that could help your business grow? Our solutions are designed for efficiency, giving you more time to focus on what's important.