This article is part of our vendor management guide.
The right vendor can be a huge asset to your business. On the other hand, a vendor that charges too much or under delivers can slow down growth and can even stunt your profits. How do you make sure you’re getting enough bang for your buck before getting to this point or, better yet, prevent it entirely? The answer is vendor spend analysis.
When done correctly, the vendor spend analysis process can give you insight into which business partnerships are having the biggest impact on your success. This allows you to streamline who you work with by deepening relationships with vendors that hit the mark and discontinuing contracts with the ones who don’t.
Let’s take a look at the A to Z of vendor spend analysis and how it can help you decide which vendors are working best for your business.
What is a vendor spend analysis?
Vendor spend analysis is a type of spend analysis that evaluates the money spent on goods and services that keep your business running.
The words “analytics” and “analysis” are often confused in this context. For clarity, vendor spend analytics refers to the data, and vendor spend analysis is the process of using the data to produce insights that guide business decisions.
When conducting vendor spend analysis, make sure to define what counts as “vendor spend.”
Vendor spend typically includes line items like:
- Physical products necessary to maintain your business. This includes everything from inventory to office supplies
- SaaS services like Slack, Microsoft Teams, and other online tools
- Services from contractors or agencies
Vendor spend typically does not include line items like:
- Employee salaries
- Employee expense reimbursements for travel or meals
As you can see, vendor spend analysis focuses on spend that is closely associated to relationships with individuals or companies outside of your organization.
Generally speaking, you should only include vendors that you plan to buy from regularly. Examples include: a monthly or yearly subscription, a long term contract with an agency, or a supplier that restocks necessary office supplies. The reason is that vendor spend analysis helps you evaluate whether to continue said relationships. As such, one-time purchases that fall outside the scope of your day-to-day business should not be included in your analysis.
Two methods of vendor spend analysis
There are two ways to analyze your vendor spending. Either you can gather all of the data yourself and search for the right insights, or you can gain insights through automated analysis.
Regardless of how you go about your vendor spending analysis, it’s vital to determine your objective first. What do you hope to accomplish with your analysis?
Common objectives include:
- Identifying areas for growth and increased spending
- Finding savings opportunities through vendor negotiation
- Reducing zombie spend
- Assessing vendor risk and ensuring compliance
Setting an objective will save you time by defining which pieces of data are relevant to your analysis. Once you have a clear direction, it’s time to choose between manual or automated analysis.
Manual vendor spend analysis
This method involves gathering information from disparate data sources and consolidating it into a single database. We’re well past the time when this was written by hand, but you might still cramp up trying to type each line of data into a spreadsheet.
Keep in mind that manual spend analysis is subject to human error. When choosing this method, make sure that your bookkeeping is up to date, including invoices, purchase orders, payments processed, and contracts.
Also, be sure to associate contracts and invoices to the right vendor. Attributing spend to the wrong contractor or company leads to misleading insights. If we’re being honest, this method is probably the most inefficient and error prone of the two.
Automated vendor spend analysis
Automating vendor spend analysis requires centralized tools and methods of payment. This type of analysis is best for businesses that wish to scale quickly and are comfortable using a tech stack to do so.
This type of automation works well when vendor management best practices are encouraged and practiced early and often. Being proactive with spending and setting rules and guidelines in advance can save you time and money later down the line.
How to analyze vendor spend manually
Manual vendor spend analysis is time-consuming, but not impossible. With diligence, you can gather the needed data and begin to understand how much is being spent with each vendor. This gives you the insights necessary to complete objectives like cost-savings or identifying opportunities for growth.
Step 1: Identify all sources of vendor spending
The most important step to manually assessing your vendor spend is to make sure you have an accurate overview of all relevant vendor transactions. Depending on your team size, this may involve looking over employee accounts to assess maverick spending.
Maverick spending occurs when employees make purchases without using the correct protocol. Because maverick spending often happens organically, it may be hard to catch if you are manually analyzing your spend.
Step 2: Collect data
The next step is to understand where your data lives. If your business is proactive about sorting invoices and bills in one place, that makes it easy. If not, then you might have to chase after credit card and bank account history, individual budgeting spreadsheets, and accounting software.
Step 3: Clean and organize data
This is actually two steps, but for the sake of simplicity, let’s combine them.
Clean data: This ensures that you don’t count anything twice and that the data that you’re looking at is actually relevant to your objective. Make sure to correct any errors before moving on to the next step.
Organize spending with clear classifications: This is so you can clearly see trends, areas of opportunity, and potential risks and challenges. Messy or mismatched classifications obscure insights and make it difficult to make data-driven decisions.
How you organize will depend on your objective. You can classify spending by business team, frequency, spending category, or any other quality that you wish to investigate. Make sure to collect the same information about each transaction.
Step 4: Analyze data
This is where you complete your objective. Once you have your data centralized and have double-checked that it’s clean and usable, you can begin to piece together which vendors are worth keeping. Common analysis includes unintentional redundancies, subscriptions or contracts that are no longer being used, disproportionate spending in low-impact areas and upcoming renewals that can be negotiated or ended altogether.
Note that manual spending does not update on its own. So the more you stay on top of it, the more accurate your insights will be.
How to automate vendor spend analysis
Automating vendor spending analysis takes a little bit of forethought, but it cuts the number of steps in half.
Step 1: Connect all spending to one platform
To automate vendor spend analysis, you must be able to connect all business spending to one platform. This can be tricky because different vendors accept payment in different ways.
To help streamline this process, look for a spend management platform that offers all of the following:
- Virtual corporate cards. These are unique and secure credit cards you can generate to pay for online goods and services. By generating a separate virtual card, you gain complete control and insight into how much money is being spent with each vendor.
- Physical cards/digital wallets. For vendors that require your physical presence.
- ACH Payments. To quickly issue a digital bank transfer.
To truly be automated, all these payments should automatically categorize whenever a card or ACH payment is used to pay a vendor. If you really mean business, integrating your accounting software is also a great idea.
Step 2: Access automated analytics
Voíla! Once you have your system and accounts set up, all you have to do is check into the dashboard. When all your spending exists in one place, you can access your spending data in real-time.
In terms of vendor spending, this makes it easier to catch duplicate spending, flag when a service is no longer being used, negotiate contracts and plan future partnerships.
3 benefits of automating vendor spend analysis
With virtual corporate cards and a connected spend management system, you can automate analytics to help you optimize and improve your vendor partnerships.
While manual vendor spend analysis is time-consuming and inefficient, automating your spend management gives you the power to make data-based decisions quickly and accurately. What does this mean in concrete terms?
You can view and control vendor spend in real-time
First, it means real-time updates on vendor spend. If an invoice is accidentally processed twice or if an unusually large purchase is made, it takes minutes to appear on your dashboard.
Instead of pulling hairs trying to figure out who purchased what and where, all of the information is available in a standardized format.
You streamline procurement and eliminate excess spend
Next, it means you’re able to streamline vendor relationships and reduce redundant spending. It’s much easier to catch where you’re able to consolidate or eliminate subscriptions and services when they are gathered into one place.
You can save your most precious resource: time
Lastly, it means you save the most precious resource of all: time.
No more updating spreadsheet after spreadsheet or catching mistakes midway through an analysis. When you automate your analytics, it reduces human error and centralizes spending data without requiring more from your team.
This means less chasing after missing pieces of information and more financial insights. What used to take finance teams hours, if not days, can now be done with the click of a mouse.
Power your vendor management with Ramp
With virtual corporate cards, real-time alerts and an AI-powered reporting dashboard, Ramp is uniquely equipped to save you time and money. Vendor invoices and payments are filed and categorized automatically, giving you powerful insights without tedious data entry.
There’s no need to keep your eyes glued to the screen when you equip your team with Ramp. Our software will notify you about duplicate subscriptions, increases in spend and unused partner rewards.
Whether you’re a small team or a growing enterprise, taking control of your vendor spend starts with automation. Get started with Ramp in under 15 minutes.