How to conduct a "spend analysis" for SMEs
Managing costs is a balancing act: cut too much and the business will suffer in the long term, spend too much and the business is losing money unnecessarily.
In theory, this balance seems straightforward, but in reality, spending is often hard to track, hard to forecast, and hard to manage, so even identifying the right balance can be a challenge. Outdated finance and data systems make it harder to keep track of spending, but they also have a more damaging downside: they disincentivise businesses from examining their costs.
Therefore, the key to managing costs is eliminating these challenges and making it easy to get a clear, real-time understanding of their business’s spending. With this data in hand, the business owner can make confident decisions on costs and strategy, eliminate needless expenses and seize lucrative opportunities.
What is spend analysis?
Spend analysis is the process of investigating a business’s spending to identify patterns. Businesses conduct spend analyses for several reasons, including cutting costs and gathering better data to inform forecasts. Most large businesses conduct spend analysis on an ongoing basis, while it is less commonly practised by smaller firms.
In fact, according to our recent survey of UK SME leaders, just 38% of the respondents use a specialist spend management platform, and 57% don’t use a specialist accounting software. These tools are the key to conducting painless and productive spend analysis, as modern integrated tools make bringing up and transferring data as simple as clicking a button. Conversely, if the data is siloed in disparate spending accounts and across several clunky spreadsheets, the process can become extremely time-consuming.
What should a business do once it has the data?
Once the business has its financial data to hand, there are three main questions that decision-makers need to ask. The first question is “where are we spending too much money?” Inevitably, businesses accrue less cost-effective expenses over time, but they often get overlooked.
During spend analysis, every line item should be up for question, in part because circumstances may have changed in the larger economy since a given decision was made. For instance, one supplier may have been the best choice in 2019, but since Brexit, another one may be cheaper.
The next question is “where are we not spending enough?” While cutting costs is often the primary goal of spend analysis, the exercise should also act as an opportunity to identify areas where increasing spend could produce a greater return on investment. For example, given shifting consumer preference, retail companies may want to increase their spending on e-commerce activities.
This investigation should extend to the current spend management system itself – if employees cannot effectively spend company money, they may be missing out on opportunities. Take, for example, a marketing team that has to forgo a timely advertising opportunity simply because spend management red tape tripped them up.
The third question that businesses need to ask is “how can we save money?” Waste can take a number of forms, such as overlapping or redundant purchases. Seeking these out and eliminating them ensures that the business is running as cost-effectively as possible.
One common form of waste spending is tail-end or variable spend, which takes the form of small, repeated costs. Fees, such as those on overseas payments and bank overdrafts, are another perennial obstacle that often goes overlooked – research by Equals Money shows that the average British SME spends £608 on unnecessary additional finance charges every month.
If a decision-maker finds that the business is losing money to these common drains, there are several options they can pursue. An audit of recurring subscriptions and services, for instance, can help avoid duplicate charges. Many software providers offer small-business licenses or per-user licenses, which are often cheaper than paying for multiple individual licenses.
Businesses that are losing money on charges should consider consulting with a payment or banking specialist to discuss ways to minimise their fees. This is especially true for businesses that pay suppliers or employees overseas, as bank foreign exchange rates are often uncompetitive.
Modern spend management platforms also offer the benefit of providing clear, readily accessible data, further streamlining future spend analyses. Businesses where employees regularly spend money should investigate an expense management system that provides employees with prepaid debit cards, as this approach improves control and visibility over expenses and makes life easier for staff.
Revisit spending regularly
Examining a business’s spending, whether through formal spend analysis or a less structured check-in, is fundamental to an SME’s financial wellbeing.
Businesses that invest in modern spend management tools have access to real-time data that enables them to identify what’s working and what isn’t, respond to issues as soon as they crop up, and make informed decisions at a moment’s notice, giving them a leg up on the competition.
Simon England is the Managing Director of Equals Money, an account designed to revolutionise the way finance teams manage their company’s payments, expenses, budgets, payroll and more.