What is spend analysis? A beginners guide

Spend analysis has become a crucial part of the procurement process nowadays. There can be a lot of money that you are losing out on, just because you didn’t pay enough attention. It can be a difficult task to figure out where you made a useless purchase, as the expenditure list can be quite daunting. Due to this reason many companies use a spend analysis tool to do the job

Now, the question arises, where do you start? What things should you focus on and if spending analysis is even worth it? We’ll be answering all of your questions in this beginner’s guide. Here is everything that you need to know about spend analysis. 

What is spend analysis and why does it matter?

Spend analysis is exactly what it sounds like, analyzing the spending pattern of your company to get a clear picture of how money is being spent. When talking about the process, we try to find out the answer to these four questions:

Who are you spending money on?

1. Who are you spending the money with?
2. How can the money be spent in an optimized manner?
3. Where can you save money?

Now that we know what it is, we need to find out why it is important. When you have a clear idea of your organization’s overall spending, you can make better decisions during the strategic outsourcing process. 

There are many ways you can do analysis. Many people use Excel and some also use automated spend analysis software to get the job done. Essentially you need to gather and upload disparate data from disparate systems that will reflect the expenditure of your company. Here is how you can start doing your spend analysis: 

How to conduct a spend analysis?

It can be overwhelming when you just start out. However, if you follow the steps mentioned below you will easily get the reports that you need.

• Identifying information sources

Initially, you need to gather all of the sources which can give you any data regarding your expenditure. The sources can be account payable, general ledger, pCard, eProcurement database, etc.

• Gather the data

After figuring out different sources, collect the data from all of those sources into a single database.

• Cleaning your data

Now that you’ve gathered the data, you need to clean it. By cleaning, we mean finding and correcting the errors in descriptions or transactions. Standardizing your data so that it can be read by anyone is also advised.

• Grouping according to supplier

Grouping your supplier can give you a huge advantage and provide you with much better insights. The way you can do this is by grouping multiple suppliers sharing a single parent company.

• Categorizing

You can categorize your spending according to the standard category classification system. Companies tend to use company-specific categories. 

• Analyzing

You, then, need to measure your data against some standard performance indicator. After comparing the data, you will get a rough number on your performance. You can then track various characteristics like savings, cost reductions, and supplier performance and strategies to improve on those.

• Repeat

You are now done with the difficult part and all you need to do is repeat the process again and again. The time interval can depend on you but doing so monthly is really useful.