What Is Spend Analysis? (Plus Types, Benefits And Sources)

By Indeed Editorial Team

Published 24 September 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Many organisations perform analyses to determine their business health. One analysis they can perform is a spend analysis. Understanding what this analysis is can help you increase your accounting skills and determine optimal decisions for an organisation. In this article, we discuss what spend analysis is, list types of this analysis, examine its benefits and describe the sources you can use to perform this analysis.

What Is A Spend Analysis?

A spend analysis is an evaluation of a company's spending to reduce costs and increase operational efficiency. Business leaders and accountants perform this type of analysis to manage procurement, the purchasing of goods and services for business purposes and sourcing high-quality and reliable suppliers. In this analysis, companies examine costs for:

  • Raw materials

  • Supplies

  • Equipment

  • Inventory

  • Ingredients

  • Professional labour

  • Consultations

  • Technology

Specifically, this analysis is the collection, organisation and assessment of data. Studying quantitative and qualitative data can be an excellent way for a business to improve processes and achieve fiscal success. Companies typically use software to gather information about purchasing history, spending trends, contract terms and performance levels. They want to make sure that they are getting sufficient value for the money they spend, improving buying power, taking advantage of savings opportunities, managing financial risks properly and spending money responsibly. They also want to build lasting and productive relationships with vendors. Spending analysis techniques vary based on an organisation's structure and needs.

Related: 11 Important Accounting Concepts And What They Mean

Analysis Types

Performing multiple types of analysis can allow for a more thorough decision-making process. There are many types of this analysis that companies can use to focus on particular components of the spending process, including:

Tail-spend analysis

Tail-end, long-tail or low-value spend refers to a company's purchases that are small, infrequent and often occur outside of a contract. Typically, they make up about 20% of a company's spending. Business leaders who focus on tracking, examining and managing tail-end spending can streamline their internal processes and save money in the long term.

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Vendor analysis

This kind of analysis enables companies to assess the amount of money that goes to various suppliers and to find the most critical vendors that support the business operations. Upon doing this, business leaders can focus their efforts on building key vendor relationships and negotiating and improving compliance with important contracts. This helps both organisations progress in the industry.

Related: What Is A Business Cycle? (Definition And Important Stages)

Category analysis

When conducting this kind of examination, business leaders divide spending into segments and prioritise transactions. By using category analysis, companies can identify which areas are the most strategically valuable to business operations. This information supports resource allocation and other high-level business decisions.

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Item analysis

Companies can perform this kind of assessment to analyse expenditures for particular items and classifying individual purchases based on reason, department and supplier. Conducting item analysis can help a company identify spend leakage, such as maverick spending, and ensure purchasing consistency. This can also help an organisation minimise random expenses and develop accurate reporting procedures.

Payment term analysis

This kind of evaluation has as its focus all of a company's payment practices, and business leaders use it to find payment techniques that can lead to discounts or generate revenue from interest rates. For example, depending on the vendor contract, early payments may mean lower costs, but they also may mean less interest spent on capital. Similarly, later payments can increase costs and create more interest spent on capital.

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Contract analysis

Contract analysis highlights a business's contracts and contract terms with vendors. Businesses use it to ensure agreements have the best, most profitable structures. A large part of this type of investigation is making sure that all parties are complying with contract regulations and that buyers are purchasing from the right suppliers.

Related: 9 Commonly Accepted Accounting Principles

Analysis Benefits

Collecting and assessing data can be the first step in improving business systems. Here are some examples of benefits this analysis can provide:

  • Inform business decisions: Looking at the critical indicators of a business's success can help an organisation make the best decisions for increasing revenue and trust with its clients. For example, identifying the total cost of raw goods for an organisation can help it make its processes more efficient by limiting waste.

  • Save money: Using this analysis encourages business leaders to identify critical indicators of success and look at other factors within the company that generate and lose money. For example, a company may find that it is losing a significant amount of money because its inventory is too large and take steps to reduce it.

  • Unify business teams: This type of analysis can encourage better communication between departments and teams within an organisation. For example, a production team and accounting team can address the needs of each other directly, leading to more efficiency in the organisation.

  • Manage supply chain risk: Identifying whether supply chains are efficient can help an organisation find less expensive options for supplies. For example, a company that produces steel products may have options for where it sources raw steel, and choose the option that has a better history of delivering the correct amount of goods.

  • Optimise relationships with vendors: Working with vendors to ensure accurate records can help organisations create a better professional relationships with the other.

  • Develop performance goals and benchmarks: Organisations can use this analysis to create better goals for departments, teams and professionals within the organisation. For example, a company can create SMART goals to help the whole organisation grow successfully.

Related: What Are The Functions Of Accounting? (Definition And Types)

Analysis Sources

Sources of this analysis are the places where employees can find spending-related information. Those who conduct analyses examine data from a variety of sources to gain a comprehensive idea of a company's purchasing behaviour. Here are some typical sources of an analysis:

  • Enterprise resource planning systems: These systems are software a business can use to organise and manage daily operational activities, including accounting, procurement, contract compliance, supply chain operations, risk management and project management. They typically comprise a central database that gathers information from various departments.

  • Spend analytics software: This kind of software has a particular focus on increasing spending visibility, collecting purchasing data and supporting executive decision-making. Using computer technology to find spending patterns makes the process easier, quicker and more accurate, and employees can spend their valuable time on more complex, unique tasks.

  • Accounting records: Many organisations can use their own accounting records to find the data they need for this type of analysis. You can use the cash flow statement, the balance sheet and the income statement.

  • Purchase orders: Purchase orders are documents in which a buyer places an order to purchase a product or service for delivery. Typically, a seller then returns an invoice that defines the price or amount a buyer owes for the goods or services, establishes the date by which the buyer has to pay, outlines the delivery date and includes other contract terms.

  • Risk analysis statements: Risk analysis statements are detailed descriptions of the potential outcomes of a company's purchasing decisions, including the extent to which certain choices can help a business reach objectives. Investing in particular areas comes with financial risk, and companies can investigate this when analysing and planning their spending.

  • Credit rating reports: A credit rating is a quantitative evaluation of an individual's creditworthiness or the likelihood that they can pay back their loan, performed by a credit reporting agency. As credit scores are based in part on a company's spending and purchase behaviour, business leaders can study credit performance to understand the effects of the previous spending.

  • External data: Other organisations may also collect data on the behalf of an organisation or keep records for industry use. This can help both organisations ensure their records are accurate and build an effective professional relationship between two organisations.

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