What is Spend Management and Analytics?
Spend Analytics is the branch of collecting, altering, and analyzing financial data. Spend analysis unveils business buying patterns through a thorough review of financial data. companies use these to manage their suppliers, track finance performance, and optimise costs. Often these terms are interchanged, although analysis is an (important) step of many in the entire process.
It helps in lowering finance costs, enhancing efficiency, monitoring and controlling workflows, and regulating compliance. It alters and manages several activities across the finance cycle. They are requisition adjustment, budgeting, planning, provider management, contract management, inventory management, sourcing, and product development.
Analysing finance spend provides data that can be used as a base to calculate improvements, and to also provide trustworthy data for developing strategies to realize short and long term savings. As finance moves to a more strategic place in the company, spend analysis is its core strategic technique which establishes an equal process that guides senior leaders and budget holders in maximizing value for the company’s dollar.
It answers fundamental questions to enhance the financial efficacy of a company.
- How much money does the company utilize?
- Which supplier supplies which products or services?
- Is the company getting what it wants for the purchase or contract?
Challenges in Spend Management and Analytics
Lower Data Accuracy
Spend data entered manually is filled with inconsistencies, mistakes, etc. Data sets with different currencies across different times with dynamic exchange rates lead to complexities and ultimately irregular entries.
Less Awareness of Sources
While a few cost centres search for spend data, shadow cost centres that exist only on the papers are easy to miss. Shadow cost centres can categorize finances and decide on budgets, but they lead to complications when managing spends.
Spend analytics takes dedicated efforts to identify, sort, analyze, and release spend data savings opportunities regularly.
Setbacks in Work Culture
While spending is a recurring occurrence across departments in finance, category managers buying the same article for different purposes are likely to be ignorant of their behaviour due to a lack of communication amongst them
Resistance to Change
Spend management is misconstrued as a threat to some stakeholders in a company. For example, suppliers, contractors, etc. would make changes in supplier selection processes or modifications to contracts done to keep spend under management a challenge to their authority and decisions. This eventually piles up to resistance to changes in contracting and buying policies, especially if the stakeholders don’t see any benefit
Types of Spend Management
Tail Spend Analysis
Tail spend is the spend in any firm that is not directly and strategically arranged in all the categories. It is the place where finance companies may be leaving money and using their resources inadequately because it usually gets the least focus. Though tail spends is usually taken as low-value purchasing, as it contains only a small portion of spend (usually 10-20% under each spend category), it is a highly important area of any organization’s spend management. Because a huge number of providers are accounting for it, it has an effect on the organization’s financial performance
Vendor Spend Analysis
Vendor spend analysis is determining how much of the spend comes from the vendors. It involves creating an extensive spend profile for each vendor using historical consumption data. Learning this can help focus efforts on finding the best value from the preferred vendors and strengthening the relationships.
Category Spend Analysis
The first step in doing a category spend analysis is analyzing the scope and extent of the category. This analysis is designed on hierarchies, and the transactions are categorized into the most apt category. The reporting lets you examine the spend in the defined spend category hierarchy, which in turn allows you to recognize spend leakage problems.
Item Spend Analysis
Item spends analysis relates to evaluating spends at an item level. It reports every individual purchase, grading each one of them to detect what department it was for and what provided was used. This testing gives the ability to understand whether a specific item is being ordered from various suppliers, or in different locations and at different item prices.
How is Spend Management and Analytics implemented?
Step 1: Identify Data Sources
To begin a spend analysis, the first step is to estimate the extent of spending. Doing this allows you to restrict those essential to purchase to just some, instead of scouting through thousands.
Step 2: Data Extraction
Once you have sorted the scope down, you can now capture your data and order all of it into one primary database.
Step 3: Data Cleansing
Cleansing is about determining inaccuracies and eradicating corrupt records and redundancies from a set of data. This includes locating and eliminating errors and discrepancies in descriptions and transactions to ensure their accuracy.
Step 4: Data Enrichment
Data enrichment refers to the process of enhancing, refining, and enhancing raw spend data. It also includes standardizing the spend data for easy viewing. Improving the spend data makes clear that all the headings and line-level names and details are accurate and to a specific naming standard.
Step 5: Classification
Unifying heterogeneous spend data into clearly defined categories makes spend easier to address and manage across the whole company. Classification is about harmonizing all purchasing transactions to a single taxonomy, enabling finance to gain visibility to the global spending to make better sourcing decisions.
Step 6: Analysis of Data
Now that data is extracted, cleansed, enriched and classified, you can analyse it to identify opportunities for savings and other finance improvements.
Benefits of Spend Management
- Once a spend management practice is enforced, it becomes easier to trace, collect, and document expenditures that enhance spend visibility. It becomes easy to audit and hence conform with multiple regulatory bodies.
- The prime objective of spend management is to determine and exploit savings affects spend chances and ultimately enhance the firm’s efficiency.
- Spend management helps collect spends on products including all extra costs, thereby securing reasonable, superior quality sourcing opportunities.
- Spend analysis also helps outline the outliers on the chart, helping identify and correct the spending.
- Spend management helps lock optimal decisions such as specified suppliers, contract terms negotiation that further lessens the process cycle.
- Thorough scrutiny through expenditures may reveal duplicate payments for a single invoice
- Spend analysis helps map and identify data patterns for the prevention of late payments punishments.
- Spend analysis monitors transactions to track a vendor’s financial performance and credibility