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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- Tip #1: Set proper parameters for your analysis
- Tip #2: Verify your aggregate spend data
- Tip #3: Use spend analysis software
- Tip #4: Guide your team through the findings
- Tip #5: Take action
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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.
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