Regardless of their size, companies often overspend on the procurement of goods and services, and most of them lack an efficient mechanism to analyze data and manage their spending. Not properly overseeing expenses can ruin a business, and RACO Investment founder Randall Castillo Ortega offers a series of tips to analyze the expenses of a business.
Expense analysis and management include the collection, categorization and analysis of expenses. The importance of expense management lies in greater opportunities for cost savings, better visibility of expenses and elimination of intensive manual processes.
For effective expense analysis, organizations must be involved in request processing, budgeting, planning, vendor and contract management, inventory management, and sourcing. Explains Castillo, “Organizations need to have a bird’s-eye view of all areas of spending. These sources include wages, rents, services, licensing, advertising, marketing, insurance, transactions and contracts.”
Expense data is confidential and often comes from sources such as general ledgers, supplier data, transaction data, credit qualifications, purchase orders and supplier contracts. With the help of an AI-based system, you can securely access a unified view of specialized dashboards and charts.
Data helps draw inferences and helps make better spending decisions. For example, the purchasing data of a medium-sized manufacturing company with annual revenues of $2 billion has more than 20,000 transactions for a single category, each with multiple price factors. Manually checking and cleaning this volume of data in Excel can be slow and inaccurate. Therefore, it is imperative to have accurate and robust models to accurately validate transactions and clean up duplicate and erroneous data.
Divide data into different categories based on the needs and goals of the organization. Data should also be segregated according to key performance indicators (KPIs) relevant to the organization, such as cost savings; supplier performance; KPIs of employees; operational KPIs; and expenses under management.
Data analytics will help you identify anomalies, duplicate expenses and recurring expenses that you can eliminate. There are several types of expense analysis that both startups and experienced businesses need to follow.
The first is the analysis of queue expenses. Tracking 10-20% of expenses that are not actively or strategically managed due to reduced focus (e.g., low-value purchasing).
Next is the analysis of supplier expenses. This includes using historical data to analyze spending on critical suppliers.
Another is spending analysis by category. This involves taking a high-level overview of each expense category, such as packaging, ingredients, distribution, marketing and sales, IT and others.
Next is the analysis of product expenses at the SKU level, followed by the analysis of payment term expenses. “Review of payment practices within the purchase-to-pay (P2P) process to take advantage of discounts from invoice payments,” explains Castillo.
It’s also important to analyze contract expenses. This will ensure the best deals negotiated through the analysis of expense leaks with suppliers.
Strategize and execute changes in order to stay a step ahead. This analyzes the data and executes the changes in phases. You can do it by department or across the organization. Even individual decision-makers can analyze expenses, adopt strategies for effective expense management, and make smart financial decisions.
Finally, event forecasting is important for future success. Forecast events and better prepare your budgets for high and low business seasons. This gives you more time to focus on other aspects of business growth.
In short, the analysis of expenses does not have to be overwhelming and lead to superficial or erroneous knowledge. With the help of AI-powered spend analytics solutions, you can get work done with fewer employees and in less time.