Finance guide: Spend analysis (definition, use cases, examples)

Learn about spend analysis, which can improve business expenditures.
Author
Isabel Peña Alfaro
Contributing Writer
Published
May 17, 2024
read time
1 minute
Reviewed by
Karen Mei
Updated
June 6, 2024

Finance teams can find optimizing spending patterns across business units and departments tedious and time-consuming. Yet, doing so is critical to ensuring that CFOs and finance managers identify inefficiencies and redundant expenditures. 

In this guide, we will dive into the benefits of spend analysis, how to conduct spend analysis, its metrics, framework, examples, and software to perform a comprehensive spend analysis.

Key highlights:

  • Spend analysis is a key tool to empower startups to evaluate their spending patterns and make informed decisions to achieve cost savings.
  • It provides comprehensive visibility into a startup's spending patterns and enables better tracking and categorizing expenditures.
  • By identifying inefficiencies and opportunities for cost reduction, spend analysis helps startups achieve significant cost savings.
  • It empowers startups to evaluate supplier performance, consolidate the number of suppliers, and negotiate better terms, leading to stronger supplier relationships and better strategic sourcing decisions.

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What is spend analysis?

Spend analysis definition

Spend analysis is the systematic process of collecting, cleansing, classifying, and analyzing expenditure data to achieve various objectives. The intention is to find ways to reduce procurement costs, improve efficiency, and enhance supplier relationships. 

Let’s dive in further.

Spend analysis objective

The objective of spend analysis is to systematically collect, cleanse, classify, and analyze expenditure data to achieve several key goals, including: 

  1. Cost Reduction: Identifying opportunities to reduce procurement costs by consolidating, reducing, or eliminating unnecessary expenditures.
  2. Efficiency Improvement: Streamlining procurement processes to enhance efficiency and reduce cycle times.
  3. Strategic Sourcing: Supporting strategic sourcing efforts by providing insights into spending patterns and supplier performance.
  4. Strengthening Supplier Relationships: Enhancing supplier relationships by making informed decisions based on performance evaluations.
  5. Increased Spend Visibility: Providing a clear picture of what is being spent, with whom, and whether value for money is being achieved.
  6. Improved Decision-Making: Enabling businesses to make data-driven decisions that optimize procurement processes and achieve cost savings.

These objectives help startups optimize their expenditures, improve efficiency, and strengthen supplier relationships through detailed and systematic analysis of spending data.

Spend analysis vs. cost analysis vs. spend management

These three — spend analysis, cost analysis, and spend management — are interconnected processes within procurement. The key differences lie in the focus, scope, purpose, and data requirements. 

Let’s dive in further. 

  • Spend analysis focuses on understanding and categorizing a business's overall spending patterns across various categories, suppliers, and departments to identify cost-saving opportunities, optimize procurement processes, and improve supplier relationships. 
  • Cost analysis, on the other hand, explores the detailed breakdown of individual cost components within a specific product or service, such as raw materials, labor, and overheads, to identify cost drivers and opportunities for cost optimization without compromising quality. 
  • Spend management encompasses a broader scope, integrating spend and cost analysis into a comprehensive strategy to enhance financial health and operational efficiency.

Spend analysis benefits

Spend analysis offers numerous benefits, including cost reduction (by identifying potential savings opportunities and minimizing maverick purchasing), improved supplier management (through enhanced visibility and performance evaluation), and increased efficiency (in procurement processes). 

There’s more. Spend analysis helps in risk management by identifying potential risks and ensuring contract compliance. It also facilitates better decision-making through data-driven strategies and real-time, direct spend visibility.

Increase performance through better resource allocation

Spend analysis plays a crucial role in improving performance through better resource allocation. 

What is resource allocation? It’s the process of optimally assigning and distributing a startup's limited resources, such as money, equipment, and personnel, to achieve specific goals or objectives.

So, spend analysis provides detailed insights into a startup’s spending patterns across various categories, suppliers, and departments.

Based on the spend analysis, CFOs, finance managers, and analysts can make decisions to redirect funds, personnel, and assets to high-priority initiatives, therefore streamlining processes and eliminating wasteful expenditures. 

Furthermore, spend analysis supports strategic sourcing decisions by evaluating supplier performance, which can lead to consolidating suppliers and reallocating resources to more cost-effective and high-performing vendors. 

Ultimately, spend analysis enhances a startup’s operational efficiency, productivity, and overall performance by helping CFOs make data-driven decisions.

Enables better category management

Spend analysis data helps improve category management by giving a clear picture of how much money is being spent on different items (e.g., office supplies, or raw materials). 

By organizing and examining this spending data, startups can identify whether they need to spend more or if multiple suppliers overlap to achieve the same output. This makes it easier to: 

  • Negotiate better deals
  • Reduce costs
  • Ensure that spending is aligned with the business's profitability
  • Find leverage during negotiations when it comes time for renewal as the company is being proactive.

Turn contracted savings into realized savings

Spend analysis helps turn contracted savings into realized savings by providing a clear and detailed view of how money is being spent compared to what was agreed upon in contracts. 

Additionally, it can help find leverage during negotiations when it comes time for renewal.

This process helps identify any discrepancies or non-compliance with contract terms, allowing businesses to take corrective actions, such as renegotiating terms or addressing maverick spending. 

How to do spend analysis

First, gather all your spending data from sources like invoices, purchase orders, and accounting systems. 

Next, clean and organize the data by removing errors.

Then, the expenses can be categorized into meaningful groups like suppliers or spend categories. 

Finally, analyze the categorized data to identify cost-saving opportunities, negotiate better deals with suppliers, streamline procurement processes, and make more informed spending decisions.

Let’s dive into each of these.

1. Identify your data sources

The first step in conducting a spend analysis is to identify all relevant data sources across the business. This includes finding data from enterprise resource planning (ERP) systems, general ledger information, purchase orders, supplier data, credit ratings, transaction data, and other internal and external systems. 

Note — gathering data from all departments and business units is crucial to ensure a comprehensive view of the company's spending. Engaging stakeholders from various departments can help uncover siloed data and ensure that no critical information is overlooked

2. Prepare your data

Next, prepare your data. There are three main steps in preparing your data: extracting, cleansing, and enriching. 

  1. Extracting: Data extraction involves consolidating all spend data into a central database, which can be challenging due to different formats, languages, and currencies.
  1. Cleansing: Data cleansing is essential. Why? You can detect and remove inaccuracies, duplicates, and inconsistencies, ensuring the data is accurate and reliable.
  1. Enriching: Lastly, enriching the data involves enhancing and refining it by standardizing names and details, filling in missing information, and validating codes, making the information more useful and easier to analyze.

3. Classification

Now, classification is a critical step in spend analysis because spend data is categorized into predefined groups or taxonomies. 

  • Predefined Groups: Spend categories are broad groupings of similar expenditures, such as office supplies, IT services, or raw materials, which help to understand where money is being spent.
  • Taxonomies: Spend taxonomy, on the other hand, is a hierarchical system of classification that ranges from general to specific levels, such as group, family, category, and commodity. A robust spend taxonomy allows for more granular and informative analysis so you can gain deeper insights into the spending patterns and make more strategic sourcing decisions.

4. Analysis

The final step in spend analysis is to analyze the prepared and classified data to derive actionable insights. This involves using analytical tools and techniques to identify trends, measure key performance indicators (KPIs), and benchmark performance against industry standards. 

The analysis can reveal opportunities for cost reduction, process improvement, and supplier optimization. 

By continuously monitoring and analyzing spend data, startup CFOs, finance managers, and analysts can ensure compliance with procurement policies, manage risks, and make data-driven decisions.

Now, in terms of how to do spend analysis, while Excel or similar spreadsheets can be a useful tool for basic spend analysis tasks, it has limitations for data processing, categorization, and advanced analytics. Many companies opt for dedicated spend analysis software for more comprehensive and efficient analysis.

These tools typically offer automated data integration, advanced data cleansing and categorization, comprehensive analytics, robust reporting and visualization, and collaboration and workflow data management. We will go into spend analysis software later in this guide. 

Spend analysis metrics and KPIs

1. Year-over-year savings

This metric tracks the savings achieved in procurement spending compared to the previous year, providing insights into the effectiveness of cost-saving initiatives and negotiation strategies. It helps startups measure their progress in reducing expenses and optimizing their procurement processes over time.

2. Maverick or rogue spending

This metric measures the amount of spending that occurs outside of established procurement policies, contracts, and approved supplier channels. High levels of maverick spending can indicate a lack of compliance, inefficient processes, or a need for better employee training and awareness.

3. Total spend under management

This KPI represents the total procurement expenditure that is actively managed, monitored, and controlled through formal processes and systems. A higher percentage of spend under management indicates better visibility, control, and potential for cost savings and optimization.

4. Purchase price variance (PPV)

PPV measures the difference between the actual price paid for goods or services and the expected or standard price. It helps identify variances from budgeted costs, evaluate supplier performance, and uncover cost savings or process improvements opportunities.

5. Supplier management

This encompasses various metrics and processes for effectively managing supplier relationships, performance, risk, and compliance. Key metrics may include supplier quality, delivery performance, cost efficiency, and responsiveness.

6. Supplier performance

This metric evaluates how well suppliers meet expectations and requirements across various criteria, such as quality, delivery times, pricing, and responsiveness. They help identify top-performing suppliers and areas for improvement or supplier development.

7. Cost reduction metrics

These metrics track the actual cost savings achieved through various procurement initiatives, such as strategic sourcing, contract renegotiations, or process improvements. They provide quantifiable evidence of the procurement function's contribution to the business's bottom line.

8. Cost avoidance

This KPI highlights the value of procurement beyond direct cost savings. It measures the potential costs that were avoided or prevented due to proactive procurement strategies, such as negotiating better pricing, consolidating demand, or implementing cost-saving solutions. 

9. Contract pricing/compliance

These metrics assess whether purchases are made by negotiated contract terms and pricing agreements. They help identify non-compliance, which can lead to missed savings opportunities or increased costs.

10. Contribution to total spend

This metric measures the percentage of a company's total expenditure managed or influenced by the procurement function. A higher contribution indicates greater procurement involvement and potential for cost savings and value creation.

Spend analysis frameworks

The spend cube

The spend cube is a multidimensional model used in spend analysis to visualize procurement data across three primary dimensions: suppliers, corporate business units, and categories. 

This framework allows companies to analyze their spending from various angles, providing insights into who is buying, what is being bought, and from whom it is being purchased.

By slicing and dicing the data, companies can identify spending patterns, consolidate suppliers, and develop more effective sourcing strategies.

Tail spend analysis

Tail spend analysis focuses on the tail-end portion of procurement spending consisting of high-volume, low-value transactions. These typically represent 80% of transactions but only 20% of total spend. 

This analysis helps startups identify and manage these often-overlooked expenditures, uncovering cost savings and efficiency improvement opportunities. By gaining visibility into tail spend, companies can consolidate purchases, negotiate better terms with suppliers, and reduce maverick spending.

Supplier spend analysis

Supplier spend analysis examines the business's expenditures with its suppliers to identify spending patterns, evaluate supplier performance, and uncover opportunities for cost savings. 

This analysis helps startups understand which suppliers they spend the most with, assess the value provided by each supplier, and negotiate better pricing and terms. It also supports supplier rationalization efforts, ensuring the company maintains relationships with the most strategic and cost-effective suppliers.

Category spend analysis

Category spend analysis involves analyzing procurement expenditures within specific categories of goods or services to understand spending patterns and identify cost-saving opportunities. 

This framework helps startups prioritize their procurement efforts by focusing on high-spend categories, enabling better budget allocation and strategic sourcing decisions. 

By categorizing spend data, companies can streamline procurement processes, improve supplier management, and achieve greater efficiency.

Item spend analysis

Item spend analysis focuses on the detailed examination of spending on specific products or services, allowing companies to identify cost drivers and opportunities for savings. This analysis helps companies understand which items are most frequently purchased, from which suppliers, and at what prices. 

By analyzing item-level spend, companies can negotiate better deals, standardize purchases, and reduce costs.

Payment term spend analysis

Payment term spend analysis examines the payment terms agreed upon with suppliers and their impact on cash flow and cost savings. This analysis helps startups identify opportunities to negotiate more favorable payment terms, such as early payment discounts or extended payment periods. 

By optimizing payment terms, companies can improve their working capital management and reduce financing costs.

Contract spend analysis

This analysis helps companies verify that they are receiving the agreed-upon terms and pricing, uncovering any discrepancies or areas for improvement. 

It involves reviewing and analyzing expenditures against existing supplier contracts to ensure compliance and identify opportunities for renegotiation. 

By ensuring contract compliance, companies can maximize the value of their supplier agreements and achieve cost savings.

ABC analysis

ABC analysis categorizes inventory or spend items based on their importance, typically using the Pareto principle (80/20 rule). 

Items are classified into three categories: 

  • A (high-value items with low frequency)
  • B (moderate-value items with moderate frequency)
  • C (low-value items with high frequency)

This analysis helps companies prioritize their procurement and inventory management efforts, focusing resources on the most critical items to optimize costs and efficiency.

Spend analysis example

Let’s dive into how a director of finance at a consumer packaged goods (CPG) company can conduct spend analysis.

Procurement

So, a major food and beverage CPG company wants to gain better visibility into its procurement spending and identify opportunities for cost savings. The company has multiple manufacturing plants and co-packers across different regions, with each facility sourcing raw materials, packaging, and services from various suppliers.

The spend analysis process begins with collecting spend data from multiple sources, such as accounts payable systems, purchase orders, contracts, and supplier records across all facilities and business units. This data is then consolidated into a centralized spend analytics platform.

The next step involves data cleansing to remove errors, duplicates, and inconsistencies in areas such as supplier names, product descriptions, and spend categorization. 

Then, advanced data enrichment techniques using machine learning are applied to accurately categorize spend into logical categories like raw materials, packaging, logistics, professional services, etc.

Once the data is cleansed and categorized, the CPG company analyzes the spend data across multiple dimensions:

  1. Supplier Spend Analysis: They analyze spend by supplier to identify top suppliers, opportunities for supplier consolidation, and negotiation leverage based on total spend.
  1. Category Spend Analysis: They then analyze spend by category to identify high-spend areas and prioritize cost optimization efforts. For example, they may find that packaging materials are a major spend category.
  1. Plant/Facility Spend Analysis: They compare spending patterns across plants to identify maverick spending, pricing variances, and opportunities to leverage economies of scale.
  1. Tail Spend Analysis: They analyze low-value, high-transaction "tail spend," which often goes unmanaged, identifying opportunities to streamline processes.

Based on these analyses, the CPG company then implements strategies like negotiating better pricing with top packaging suppliers, rationalizing the supplier base, and centralizing procurement for certain categories.

They also integrate spend data with other supply chain and finance data to enable comprehensive spend forecasting and budgeting. 

Periodic spend reviews help sustain savings by monitoring spending patterns and supplier compliance.

Overall, this data-driven spend analysis provides the CPG company with detailed visibility into its procurement spending. It enables sustainable cost savings while optimizing supplier relationships and procurement processes.

Spend analysis software

1. Rho

Rho is considered one of the best spend analysis platforms because of its comprehensive and integrated approach to financial management, which combines expense management, accounts payable (AP) automation, corporate cards, and treasury services into a single platform. 

Unlike many competitors, Rho offers a seamless, fee-free platform experience with no charges for users, card payments or accounts, making it a cost-effective solution for businesses. 

The platform's robust features include customizable spend rules, real-time expense tracking, automated AP workflows, and native integrations with major ERP systems like QuickBooks Online, Oracle NetSuite, Microsoft Dynamics 365 Business Central, and Sage Intacct, which streamline financial operations and enhance data accuracy. 

Rho's AI-powered invoice and bill processing features enable automatic digitization and synchronization with ERP systems, ensuring accurate and timely financial reporting. Additionally, Rho provides comprehensive visibility into spending trends, helping companies uncover savings opportunities and maintain better control over their expenditures.

Rho's user-friendly interface and 24/7 customer support ensure that businesses can efficiently manage their finances, reduce manual tasks, and gain real-time visibility into their spending, ultimately leading to better financial control and decision-making.

2. SAP Ariba

SAP Ariba Spend Analysis is a tool designed to provide comprehensive visibility into a company's spending patterns by aggregating, classifying, and enriching spend data from multiple sources. 

The solution leverages advanced analytics and machine learning to deliver actionable insights, enabling procurement managers to identify cost-saving opportunities, optimize supplier relationships, and improve compliance. 

With features such as data cleansing, enrichment, and customizable dashboards, SAP Ariba helps procurement organizations make informed, data-driven decisions to enhance their procurement strategies and achieve greater efficiency. 

The platform's integration with SAP Analytics Cloud and SAP Data Warehouse Cloud further enhances its analytical capabilities, providing a 360-degree view of spend data.

3. Coupa

Coupa is an AI-driven cloud-based spend management platform that offers comprehensive solutions for managing both direct and indirect spend across procurement, supply chain, finance, and more. 

The platform provides detailed visibility into business spend through easy-to-use dashboards and reports, enabling companies to identify savings opportunities, reduce risk, and improve efficiency. 

Coupa's analytics and AI capabilities, such as Spend Guard and Community.ai, help detect fraudulent spend, standardize and classify spend data, and leverage community insights for better decision-making. With its unified approach to spend management, this spend analysis tool allows businesses to optimize their procurement processes, enhance supplier management, and achieve significant cost savings.

FAQs about spend analysis

What kinds of reports do you use in spend analysis?

In spend analysis, various types of reports are used to visualize and analyze procurement data effectively. Let’s go over each of them. 

Pivot tables provide a flexible way to summarize and aggregate spend data across different dimensions, such as categories, suppliers, and departments. 

Line charts are useful for tracking spending trends over time, while bar graphs and stacked bar charts help compare relative spending amounts across different categories or suppliers. 

Pareto charts, based on the 80/20 rule, visually highlight the key suppliers or categories that account for the majority of spend, aiding in opportunity identification. 

Sankey diagrams offer an intuitive representation of spend flows and breakdowns across multiple levels. 

Map reports display geographical spend patterns, enabling analysis based on regions or locations. 

Treemap reports use proportionally sized rectangles to depict the relative spend across a single dimension, such as commodities or suppliers. 

Finally, waterfall charts illustrate the cumulative effects of positive and negative spend changes, providing insights into cost savings or increases.

What are the four stages in spend analysis?

The four stages in spend analysis are data collection, data cleansing, data classification, and data analysis. 

  • Data collection involves gathering expenditure data from various sources such as invoices, purchase orders, contracts, and supplier information to compile a comprehensive dataset. 
  • Data cleansing ensures the accuracy and reliability of the collected data by removing duplicates, correcting errors, and standardizing formats. 
  • Data classification categorizes the spending data into different groups or categories, such as direct and indirect spending, to facilitate vendor management and analysis. 
  • Finally, data analysis involves examining the categorized data to identify cost-saving opportunities, optimize procurement processes, and improve supplier relationships.

What are the three core areas of spend analysis?

The three core areas of spend analysis are visibility, analysis, and process. 

Visibility involves gaining a comprehensive view of all spending data, ensuring that expenditures are tracked and categorized accurately to provide a clear picture of where money is being spent.

Analysis entails examining the collected and cleansed data to identify spending patterns, cost-saving opportunities, and inefficiencies, enabling informed decision-making. 

Process focuses on implementing and optimizing procurement processes based on the insights gained from the analysis, ensuring continuous improvement and better management of resources.

Conclusion: Control spend with Rho

To get a clear and robust spend analysis, consider Rho. All wrapped up in unbeatable pricing and 24/7 customer support, Rho offers a comprehensive, all-in-one solution. Rho’s spend analysis integrates corporate cards, expense management, accounts payable automation, banking, and treasury services into a single platform, providing seamless and real-time spending visibility. 

Its robust features (such as customizable spend rules, automated AP workflows, and native integrations with major ERP systems) streamline financial operations and enhance data accuracy, making it easier for finance procurement teams to manage and optimize their expenditures efficiently, cutting time for finance teams.

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