If you’re a small business owner or founder, it’s easy to miss crucial pieces while conducting a spend analysis. For example, you may be unfamiliar with spend analysis, so you simply don’t know what’s missing in your process. Or, you may rush the process because, let’s be honest, you probably have a thousand other tasks on your plate. Either way, making mistakes with your spend analysis can cause major rifts across your business, so knowing how to tackle them effectively can be a huge bonus for your operation.
To help you develop the most effective spend analysis for your business, we gathered advice from finance experts across various business sectors and positions. Here, they’ll shed some light on some of the most common spend analysis mistakes small businesses make across various pillars, from data management, to expense tracking and more.
Faulty aggregate data management
When we spoke with industry experts, several of them said the biggest issue with how companies conduct spend analysis is that they start with faulty data. And, unfortunately, a skewed premise will rarely create a valid result. Here’s what they had to say:
Not identifying all data sources and manually entering data
"People often fail to identify all the sources of expenditure, and shadow cost centers existing [only] on paper are easily missed out. In addition, data is often riddled with inconsistencies due to manual feeding processes."
Lack of categorization and outdated data
“I think a couple of the biggest spend analysis mistakes people make are using old data and not linking spend to budgets.”
- Todd Ramlin, Manager, Cable Compare
Working with incomplete data
“One of the most typical mistakes is failing to record cash expenses. It's because all of the other expenses are backed up by a [billing statement] document, but there isn't one in the case of cash spending. Excluding this could raise [problems] in the long run.”
Mixing financials and not keeping records
"[The first mistake I often see is] Combining business and personal expenses; regardless of how big or little your company is. It eventually becomes too chaotic and difficult to track. [The second is] failing to record expenses [by] either [not] correctly document all of your spendings...[not] keeping receipts organized...[or not] recording them right away in account records.”
Gathering data in an unstructured way
“The biggest mistake I see in these areas is not tracking expenditures at all. Many organizations do not track expenses in a clearly structured way in order to glean insights and apply the necessary management principles. The right structure leads to the right outcomes.”
Not accounting for spending shifts
“One of the biggest mistakes we make during the analysis is to not account for the shift in spending tracks. This leads to data inaccuracies and hence a misguided decision-making process. It is important to collect data for multiple years and account for the shift in spending patterns. It will allow you to see developing trends because it is not necessary to spend the same amount of money which you spent last year. The amounts may vary, so there should be a record for it."
Not verifying historic data
“If we don't correct past expenditure data, we run the danger of creating an incorrect market basket for our RFP or RFQ. Worse, we may rule out whole supplier relationships from consideration."
- Richard Mews, CEO, real estate investor and developer, Sell With Richard
Estimating future business expenditures is a crucial piece of financial planning & analysis as it is the foundation for building actionable takeaways from the study. And according to these experts, some expenses may be getting overlooked.
Assuming expenses will remain static
“The most common mistake companies make is to think that their expenses will stay static with no room for growth. However, spend analysis cannot be done without careful planning and consideration of where your company is headed – an understanding of which spending areas should become more or less significant in line with future goals.”
To get the most insight from spend analysis, it should have clear parameters around what spend is being analyzed and for what purpose. Otherwise, you will end up with data that doesn't inform your goals. For example, suppose you want to understand how your procurement process affected the price of acquisitions in the past year. If you don't set parameters specific to the year you're interested in and the categories you need, your analysis won't provide the information you need.
Not setting time parameters
“Establishing a time range for data collection is necessary, but you must determine how far back to go in order to know that information. An order that is placed numerous times during the year may require data collection that lasts for twelve to eighteen months in order to uncover price and contract conditions that are meaningful. In contrast, capital expenditures occur but rarely over long periods of time...If you don't, you risk underestimating or overestimating needs on your RFP or RFQ, among other things."
Only including a narrow field of suppliers
“Many businesses get so obsessed with the big picture that they forget the importance of low spend suppliers. Low spend suppliers offer a range in the market with less competition and more room to grow as the process would be already streamlined.
This means fewer players to challenge your authority in the market. Going after high spend suppliers will give you less chance of striking a better financial deal.” - Adam Garcia, CEO at The Stock Dork
Getting bogged down in product comparisons
“Getting too granular with your study, such as comparing individual goods to overall spending, might slow things down and make it too complex and overburdened with details. You can always delve further into a product, but only after the spend analysis has been done.”
Not presenting the spend analysis findings in an actionable way
After going through the process of spend analysis, put the data to work by creating actionable takeaways that reflect key performance indicators (KPIs) and are easy to understand and apply.
Misrepresenting your findings
“Choosing the wrong kinds of graphs to convey your findings is one of the most common mistakes made in expenditure analysis. Data visualization is an effective tool for communicating your findings to our team or audience. However, if you don't visualize your data correctly, you may confuse and mislead your audience.
There are numerous ways to make your data visualization seem inadequate, but one of the most frequent is to choose the incorrect graph or chart to represent your data.”
- Mike Chappell, Founder, FormsPal
Gaps in scoping
“I always see people fall into the scoping gap, which is to say, they conduct the spend analysis, they get the insight into spending habits in order to better understand where operational cash is going, but they don't translate all of that into actionable steps for reducing costs.”
- Rolf Bax, Chief Human Resources Officer, Resume.io
Lack of long-term action on the findings
So, you’ve sorted your data, you’ve carefully considered each expense, you’ve set parameters, and you’ve translated actionable insights from your findings, but there’s one more step toward success in the spend analysis process: planning for the long-term.
Not creating a plan at all
“The biggest mistake I've seen people make is spending without a plan. Staying on top of how much you earn, spend, and save is absolutely key to accomplishing financial goals.”
- Olivia Tan, co-founder, CocoFax
Not putting the proper policies and tools in place
“The biggest mistake I see small businesses make when it comes to expense management is the lack of follow-up or analysis after the policy is in place. You can have a rock-solid policy on paper, but if you don't have the tools to flag policy exceptions or systematically understand where the money is being spent, expenses can get out of control quickly. ”
Not considering the future in present plans
“Prioritizing short-term costs or gains over long-term forecasting in the decision-making process [is the biggest mistake I see]. Planning for long-term growth sometimes means profits take a short-term hit, and putting too much focus on [the] next quarter’s profits can impair your ability to scale over time.“
The future of spend analysis is automation and AI
Conducting a spend analysis can feel intimidating, especially as an SMB owner or founder with a lot on your plate. Thankfully, with spend management platforms like Ramp, automation, and AI do all the hard work for you, so you can avoid these common mistakes.