October 21, 2021
How-to

5 expert tips on executing an effective spend analysis

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Spend analysis is one of those buzzy phrases that finance experts like to throw around, but few professionals know how to actually execute. 

 

Many founders and small business owners find themselves in charge of conducting spend analyses because of small, nonexistent, or time-crunched finance departments. The process often feels overwhelming because of limited resources—primarily bandwidth—and lack of a formal financial background. Because of this, they often make the same common mistakes that lead to shallow insights—or worse, the wrong insights, leaving them questioning whether spend analysis is effective at all.

 

However, this process, done well and with the right tools, doesn’t need to take a vast amount of time and can help teams discover inefficiencies in the supply chain. A spend analysis ultimately increases expense visibility, reduces procurement costs, and can secure your ability to grow by improving processes. To effectively conduct a spend analysis, it’s essential to start with the correct data, use the right tools, and follow through on your findings.

 

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What is spend analysis?

Spend analysis is the process of reviewing external spend across various expense categories to determine whether you could spend less going forward.


How do I conduct a spend analysis?

Conducting a spend analysis includes three major phases:

  • Defining project scope
  • Parsing through data
  • Turning data into insight

Let's break that down into a simple 10-step process.


Step 1: Define parameters for your spend analysis

Defining proper parameters for your analysis starts with deciding what insights you hope to gain. Determine which department(s), time periods, vendor groups, customer accounts, and processes you want to analyze and set parameters accordingly.


Step 2: Identify spend data sources, such as general ledgers and financial documents

Identifying data sources before starting will help you create a structure for gathering data and ensure you gain a complete picture of spend.


Step 3: Identify Key Performance Indicators (KPIs)

Identifying KPIs most relevant to your business will depend on factors like category, commodity, and, most importantly, your primary goals surrounding procurement spend. KPIs will vary based on the company, but a few common ones are:

  • Number of suppliers
  • Number of transactions
  • Transaction distribution by currency
  • Spend by procurement function
  • Number of people involved per commodity

Step 4: Identify spending patterns

Spending patterns will vary by company, but they will often include spending cycle time periods and fluctuations. Understanding these will help inform the parameters you set for the data sourcing and analysis.


Step 5: Collect data

Once you have clear goals, structure a process for data sourcing, and identify spend patterns, it’s finally time to collect the data!


Step 6: Cleanse the spend data of inaccuracies

After gathering the data, it’s essential to address any inaccurate, duplicate, incomplete, or irrelevant parts of your data before inputting it into the analysis.


Step 7: Categorize data

Once you have complete data, group data according to what will best inform your KPIs, for example, financial category or supplier.


Step 8: Identify weaknesses or inconsistencies in supplier management

After data categorization is complete, analyze KPIs and finance metrics to find discrepancies or inefficiencies in supplier management, such as duplicate providers or services.


Step 9: Identify cost reduction opportunities in the procurement process

You can find opportunities to save in actual spend versus policy, duplicate or wasted resources, opportunities to negotiate lower pricing, etc.


Step 10: Create an actionable plan that targets KPIs

If you don't complete this last step, all of the previous steps are wasted. Once you’ve gleaned insights from the analysis, make a plan to improve KPIs based on the findings.


Tip #1: Set proper parameters for your analysis

It’s essential to start by setting a scope for your spend analysis so you can gather data that will best inform an accurate picture of the expenses you want to analyze. From there, set data parameters that will encompass the details you need and exclude any extra data that will only cloud your analysis. Without proper data parameters, you run the risk of underestimating or overestimating factors such as company expenditures, volume, and needs.


Set time parameters

“‘How far back should I go when gathering data?’ is one of the first questions you should ask yourself when you begin the expenditure analysis process,” says real estate investor and CEO of Sell With Richard Richard Mews. “The response is contingent on the goods or services being bought. Take, for example, office supplies or any other comparable product—when preparing a strategic sourcing effort, we usually collect a year's worth of data from a customer to verify that we're correctly establishing a foundation for use.”


Creating a foundational time parameter for spend analysis starts with identifying spend cycles that reflect normal spending fluctuations, like monthly, seasonal or annual trends. Once you determine these cycles, decide how many of them you need to analyze to encompass the expenditures you want to examine.

“We might only use the previous month, but are you sure that this short period indicates normal usage?" says Mews. "There are other reasons to go much farther back in time. For example, if capital expenditure (CAPEX) purchases are essential to your research, you must identify these periods and gather data appropriately.”

Look at what other organizations analyze 

You can learn a lot by studying how similar organizations conduct their spend analyses. Compare their data scope with your own as you develop the parameters for your analysis. Some pieces of data to consider are what time period did they gather data from, how granular they went, and, ultimately, what actions they took to streamline procurement based on the insights.


“The best approach to spend analysis is to do a benchmarking analysis. This enables companies to compare their expenses against top-quality organizations that are similar in size or have undergone a recent restructuring. Benchmarking for spending efficiency can provide valuable insights into improving processes, which will lead to reducing wastage and achieving objectives,” says Michael Knight, Founder and Growth Hacker at Incorporation Insight.


Tip #2: Verify your aggregate spend data

Incomplete or inaccurate data skews the results of your spend analysis, and poor data management is an easy trap to fall into. Before crunching the numbers, review each data source you plan to study to ensure up-to-date and complete information. Only include expenditures that fall within the parameters of your analysis, such as time period and department.

Identify all data sources

Curate comprehensive data to inform your analysis by identifying all data sources. This may include reviewing general ledger reports, balance sheets, and income and cash flow statements. If you don't, you will end up with an incomplete picture of spending, which will lead to incorrect findings that will make it impossible to gain actionable insights.


“Identifying sources of expenditure and its analysis is one of the best approaches for successful expense management. These activities must be carried out uniquely by plotting and identifying an exhaustive list of expenditure sources. Thereafter, centralizing all expenditure data,” says the founder of TruePeopleSearch, Marilyn Gaskell.


Collecting the data can be done by entering it into a simple spreadsheet or—for the most effective approach—employing a spend management software automation to pull the data for you.


Keep detailed records 


If data sources like purchase orders and financial documents are misplaced, unrecorded, or miscategorized, it’s difficult to attain true spend visibility. Therefore, it’s fundamental to your spend analysis that you create a strong data sourcing strategy to correctly document your spending from the beginning, putting structured processes in place to prevent these mistakes.


“The ideal strategy is to keep receipts organized. And, if it's a monetary transaction, make sure to record it right away in your accounting records. This is also necessary to back up any reimbursement claims that may have been overlooked or forgotten over time,” says the managing broker of CondoBlackBook, Sep Niakan.

“A common mistake that startups and small business owners often make is mixing business and personal finances. Separate your business and personal costs at all times,” says Niakan. “You should never mix personal and business costs, regardless of how big or little your company is.”

Another critical component of correctly documenting spending is including documentation for cash expenditures, which often go unreported. "Make certain that you correctly document [cash spending]," says President and CEO of Revelation Machinery, Tanner Arnold. "To avoid any future issues, keep the receipt and other documents in a safe place."


Use accounting software to save time


Keeping granular records and categorizing data along the way can seem time-consuming and even impossible to maintain as a small or medium sized business with a tiny or nonexistent finance department. However, using accounting software can take a lot of the stress and time out of the process, simplify category management, and help you maintain clear documentation.


“Don't worry if you do not have a formal finance department, just prepare yourself with the right tools,” says entrepreneur and HR professional Karisa Karmali of Self-Love and Fitness.

Clean and categorize data

Financial documentation will only get you so far if the data you pull from the documents is faulty or not sorted in a meaningful way. Therefore, cleanse and categorize your data before starting your spend analysis.


Clean your data of any duplications in product names and suppliers. Consolidate data from multiple sources into one document. And finally, classify data according to product type, category, objectives, and timeframe. Doing so will not only make the data easy to read but also indicate if there are any inconsistencies or mistakes,” says CreditDonkey budgeting expert, Donna Tang

Tip #3: Use spend analysis software

One of the most overwhelming parts of conducting a spend analysis is the time and effort it takes to develop the underlying processes to conduct one. Spend analysis software automates those processes, so you spend less time collecting and crunching numbers and more time using insights for strategic decision-making.

Use automation to save time

Automated spend analysis software is especially important for SMB owners who manage expenses on their own. “In all likelihood, if you're a lone entrepreneur with a burgeoning small business, you are handling a lot of the expense management on your own, and it is taking up valuable time that could be spent elsewhere,” says Chief Human Resources Officer at Resume.io Rolf Bax.


Take Ramp’s spend analysis software, for example. Powered by AI, the software gives you insights into common issues like duplicate spend and can also automatically suggest savings opportunities across expenses, like lower tiers of SaaS plans—taking a review process that could easily take a few hours and condensing it into just a few minutes. So be sure to look for a software like this that automates several steps of the spend review process, in turn giving you time back to work on other aspects of your business. 


Ramp spend analysis software automatically detect duplicate spend and sends you a notification

Save money on accountants

You may wonder: is it more cost-effective to hire a full-time accountant, contract an accounting consultant, or purchase an automated spend analysis solution? Short answer: the expense automation software will provide the most cost savings. Let's break it down.



“I believe in the value of spend analysis and expense management, but doing it the old-fashioned way can be expensive, labor-intensive, and yield less accurate results than with modern tools. Digital solutions put finance department capabilities in the hands of smaller businesses that couldn’t otherwise afford the overhead of a traditional in-house finance department,” says manager of CableCompare.com, Todd Ramlin.


Use software to analyze spend as you scale

The larger the company, the larger the data pool. And the larger the data pool, the harder it is to analyze data manually. And the harder it is to analyze the data, the harder it is to uncover savings opportunities, which is where a spend analytics solution comes in.

“We swear by our spend analysis software,” says Bax. “Digital tools start to become a necessity the bigger you get because there is more data to crunch and a lot more manual work required, which makes staying on top of spending that much more tedious and prone to error.”

Surface unique insights

Capturing data and analyzing it through spend analysis software isn’t just easier but also provides more accurate data and deeper insights.


“[A spend analysis tool] helps companies understand in-depth about what, how, and where they are spending,” says John Marsano, CEO & president at Inheritance Advanced. “Most importantly, it also tells if the business is getting their money’s worth.”


One example of how spend analysis software helps surface optimization insights, according to Othniel Denis, principal at Excellent Ones Consulting LLC, is presenting the data in easy-to-understand visuals.

“The most successful approaches or tools I’ve seen applied is the utilization of visualization dashboards,” says Denis. “[They] can be used to quickly identify adverse trends and react with corrective measures.”
Ramp spend analysis insights dashboard view

Tip #4: Guide your team through the findings

Even a spend analysis that is done well won't bring change if your findings aren't presented in an actionable way and in terms your team understands.

Educate leadership on financial literacy

The first step in leading your team toward action is educating leadership on foundational terminology and concepts that will help them understand the findings and empower them to enforce subsequent policies. And this goes beyond just your procurement team; it should extend to stakeholders in every business unit.


“Take steps to ensure everyone in leadership is financially literate and understands basic economic concepts,” says the owner of Green Lion Search Group, Michael Moran.

“If individual decision-makers are able to analyze expenses effectively, this puts less pressure on a small department to be the watchdog of the entire company and allows you to make smart financial decisions even without a finance department.”

Moran added that engaging your employees in the spend analysis process will directly impact productivity and profits as they buy into the process.

Interpret data into actionable insights

“Before you make a graph and distribute it to others, consider why you're doing one in the first place,” says Mike Chappell, founder of FormsPal.


Once your team understands the terminology and thought process, present the data to them in a way that accurately reflects the findings and directly informs KPIs. This includes forming clear narratives around the data that connects it to company goals.

Tip #5: Take action

One of the biggest mistakes companies make is not creating a plan for long-term action on the findings of their spend analysis. After you’ve gleaned insights and shared them with your team, put actionable goals in place to realize potential savings.

Set up expense policies that reflect your goals ASAP


Merchant restrictions in Ramp


“Decide clear expense policies and start proper expense management ASAP,” says Gaskell.


Policies should reflect your goals moving forward, impact KPIs, and promote financial accountability within the organization. The key to successful spend management is clearly stated and consistently enforced policies. You can curb maverick spend by using spend management software to dictate and enforce policy.


The best tools I've seen create a frictionless process for employees to submit expense reports and give the company's decision-makers nearly real-time tracking of spend categories and policy violations so they can take action right away,” says Jillian Plank, founder, CPA, and financial advisor for businesses at Spring Accounting.

Follow-up consistently

Once policies are in place, make sure to follow through on them by setting up procedures to support them.


After creating an expense policy, carry out internal audits regularly,” says Daniela Sawyer, founder and business development strategist at FindPeopleFast.


With spend analysis findings informing your policies, you can follow through with more decisive actions that better safeguard your company's future.

“Calculate what working capital is necessary for your business, and forecast expenses with that as a starting point,” says Knight. “Reevaluate every month to see how far off projections were from reality—if it was under or over what was predicted.”

Save time and money with Ramp

Here at Ramp, we’ve heard quite a few horror stories about spend analytics gone terribly wrong, which is why we developed our intuitive spend management software that uses AI and automation to take all the hard work out of managing your company spending and surfacing actionable insights to save you money.


We built our product around the simple idea of saving you time and money. Learn why Ramp is the fastest-growing corporate card in America.

Spend analysis is part of our Ramp Finance Glossary.


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