The 4 Stages In Spend Analysis And How To Perform Your Own
To uncover hidden cost-saving opportunities within your business, gaining a clear view of its spending habits is crucial. You have to know where every dollar is headed.
Savvy procurement professionals use spend analysis to meet their product cost reduction targets, often achieving savings of 3% to 5% of the analyzed spend. Now, that's real money back in your pocket!
But here's the catch: to maximize your savings potential, you need to make spend analysis a continuous habit. It's like peeling back the layers of an onion. You go through each step of your manufacturing process, searching for outliers—those sneaky spend culprits—analyzing them, and executing careful plans to reduce those costs.
In this post, I'll walk you through the four stages of spend analysis and show you how to make it work like a charm for your own business.
What Is Spend Analysis?
Spend analysis provides a clear view of your business's spending structure, taking the guesswork out of the equation. It goes beyond cash flow, revealing hidden problems like undisclosed payments, duplicate expenses, and chances to renegotiate with suppliers.
Think of it as a comprehensive report with actionable insights and recommendations. Armed with this data, you can confidently make informed decisions and take steps to improve your company's financial health and supplier management.
What Is Procurement Spend Data?
Procurement spend data, also known as spending data, encompasses details about a company's expenditures on external goods and services.
Consider it as a financial journal for your business, allowing you to monitor spending on items sourced externally. It offers insights that can help you gain a clearer grasp of your spending patterns, make informed financial choices, and optimize your supply chain and supplier relationships.
Benefits Of Spend Analysis
Here are the main benefits of conducting spend analysis:
Identify spending patterns and trends
Spend analysis helps you see how your company's money flows over time. Going through past data can reveal buying trends, shedding light on where your funds are allocated and whether your spending habits are evolving. With this information, you can make informed decisions based on historical insights and current market conditions.
Uncover areas of waste and savings opportunities
Spend analysis is also useful for pinpointing places where you're spending money inefficiently. You can scrutinize your purchasing data to uncover unnecessary expenses, duplicate orders, or overinflated prices. This will enable you to take decisive actions, cutting wasteful spending and finding strategic sourcing opportunities.
Develop strategies to improve overall financial efficiency
With a crystal-clear understanding of your spending and potential savings, spend analysis empowers you to make your company's money work better. You can engage with suppliers to secure better deals, standardizing procurement processes, consolidating purchases, and implementing cost-control measures, all of which contribute to improved profitability and financial stability.
The Four Stages Of Spend Analysis
The process of spend analysis typically follows four distinct stages:
1. Data Collection
Collect data from various sources, like your financial records, invoices, purchase orders, and receipts. This initial step is crucial because it sets the foundation for the entire spend analysis process.
2. Data Cleansing
Once you have the data, it's time to get into the nitty-gritty of data cleaning. Carefully review your data to ensure it's accurate and complete. Fix any errors, remove duplicate entries, and ensure everything follows a consistent format.
3. Data Analysis
With your cleaned data in hand, the next stage is data analysis. This is where you put on your detective hat and start uncovering valuable insights. Look for patterns and trends that can reveal areas of excessive spending and potential cost savings, and assess how your suppliers are performing. This will give you a deeper understanding of your spending habits.
4. Reporting
Finally, it's time to share your discoveries with the procurement team. Create reports that show your discoveries and suggest ways to make things better. It could include insights to help reduce costs, make operations smoother, and improve relationships with suppliers. This will ultimately guide the way forward for superior financial management at your company.
How To Work Through The Spend Analysis Process In 5 Simple Steps
When starting your first spend analysis, don't rush or try to tackle everything at once. Begin small, and concentrate on one main goal following these five simple steps:
Define What You’re Analyzing
Before kicking off your organization's spend analysis (also called spend analytics), you need a clear understanding of your objectives.
Think about what you want to achieve through this process. What burning questions do you need answers to? Are there any hidden trends you're eager to uncover? Setting a well-defined goal will not only steer you in the right direction but also make sure that the data you collect during the analysis isn't just data – it's valuable insights that can drive your decision-making.
Identify Data Sources
Identify all the sources that record your spending information. It's crucial to not limit your search to just your purchasing team's records. Expand your scope across the entire organization to uncover any hidden data.
Take a comprehensive look throughout the different departments, plants and business units, as well as your accounts payable, general ledger, purchase orders, invoices, contracts, and eProcurement systems. It's amazing how many different places data can pop up. So, when you conduct your data audit, be thorough and dive deep into the details.
Extract and Cleanse Data
Once you've defined your project's scope, the next step is collecting and organizing your spending data in one central place. This can be a bit tricky because data often comes in different formats, languages, and currencies.
Here's where data cleansing becomes crucial. Think of it like a big clean-up job, where you find and fix mistakes, remove bad records, and get rid of things you don't need. It also involves checking for errors and differences in descriptions and transactions to make sure everything is accurate.
In the end, data cleansing helps you find and fix incomplete or unimportant information in your database. It corrects mistakes, checks for missing details, and keeps your data up-to-date and accurate.
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Classify and Analyze Data
The next important step involves categorizing and analyzing data, aimed at making your collected information more accessible and helping you get to the bottom of things.
First, you organize the data by grouping it based on departments, vendors, or types of expenses—whichever method suits you best. This grouping is similar to sorting puzzle pieces into different piles, making it simpler to see the whole picture.
Once your data is organized, you dive into analysis. Dig deep to find answers to specific questions and find valuable trends. Think of it as being a detective in the world of data. You can also explore statistical techniques like regression analysis to uncover hidden insights.
Implement Spend Analysis Tools
Why should you care about implementing automation in your spending analysis? Well, your spend analysis data is a goldmine of insights that can drive improvements in your processes. For instance, if you've been grappling with consistently slow payment processing, it might be time to explore the benefits of an eProcurement System. Such a system can streamline and accelerate your payment processes, ensuring greater efficiency in your operations.
Also, think about using spending analysis software. They have features like auto-cleansing and self-learning that can greatly help in managing your finances. The real magic is in their automated and real-time data extraction, which allows for accurate and speedy spend analysis, even in a constantly changing environment.
Want More On Spend Management?
Spend management and analysis isn't a one-time task; it's a continuous process that evolves with your business. By understanding the key stages of spend analysis and implementing the process as we've discussed, you can drive cost savings, enhance supplier performance, and make data-driven decisions that ensure your business thrives in an increasingly competitive landscape.
Check out our guide on the key benefits of a business intelligence (BI) system and start building your own successful business intelligence strategy. But that's not all—to keep yourself in the loop with even more valuable insights and information from The RevOps Team, be sure to subscribe to our newsletter. Stay informed, stay ahead!