2021 was yet another turbulent year for the country’s small businesses, with the continued impact of the pandemic still posing a threat to their financial wellbeing. To compound matters further, UK inflation has surged to its highest rate in three decades.
Going on a new year cost-cutting spree might be an instinctive reaction, but cutting too much too quickly could end up jeopardising your company’s long-term success. Instead, set time aside to conduct spend analysis by interrogating your spend data to get a clear picture of your company’s financial health.
Once you know exactly where the money is going, you’ll be in a much better position to make decisions about where to spend and identify opportunities for reducing costs in 2022 and beyond.
Spend analysis explained
Spend analysis places the business’ spending under the microscope to uncover patterns, capture concerns, and gather insights to inform planning better. Its primary goals are to identify and eliminate waste, find ways to save, and make accurate financial forecasts.
The ease with which you can conduct a successful spend analysis depends mainly on your tech setup and the quality of your data. It will be significantly more tedious and time-consuming if it’s mired in different spending accounts and concealed in multiple spreadsheets.
Using a platform that enables spend analysis allows you to gather and upload data from disparate systems to create a single source of truth of your entire company spend. However, in our recent survey of SME leaders in the UK, just 38% of the respondents use a specialist spend management platform.
Equally, data will be less accurate if you don’t have specialist accounting software to categorise spending and pull insightful reports. Over half (57%) of SMEs face such an issue.
Questions to ask during a spending analysis
Business spending is far more complex than, say, buying a new set of tyres for your vehicle.
So, before diving into your spend data, ask the following three questions first.
Where are we spending too much money?
Bigger projects understandably take the largest chunk of the budget, which is easy enough to set at the start of the year. Whether a project will achieve its goals is somewhat less discernible, and businesses often lose visibility quickly as to whether it’s running according to budget.
While it’s customary to review spend at the end of a project to determine whether the capital outlay justified the projected ROI, it might be a case of too little too late since the money had already been spent regardless. Ideally, you want constant access to real-time data to conduct analysis more frequently and make informed decisions during the project to keep it on track and within budget.
Where are we not spending enough?
Business owners are often fixated on spend going out of the business. However, spend not going out can be equally damaging if it’s not applied in the areas that need it. This is particularly true for areas that have the potential for generating strong ROI.
An unwieldy spend process can also be a major inhibitor for employees if they cannot spend as and when they need to ‘ for example, a marketing team having to forego a timely advertising opportunity because spend management red tape tripped them up.
How can we save money?
Wasted and redundant purchases are undeniably a significant financial concern for businesses, yet it’s an aspect over which not all have sufficient visibility.
A good example of this is tail-end spend, also known as variable spend, which is small, repeated costs. Business owners often regard these as insignificant expenses, but they can quickly spiral out of control if left unchecked. Different departments don’t always communicate, resulting in redundant purchases such as duplicate software subscriptions.
Hidden fees are another low-visibility expense that you can eliminate if detected. Research from Equals Money shows that British SMEs spend, on average, £608 on additional finance charges each and every month.
These include fees payable on overseas payments and bank overdrafts. Inaccurate expense claims or rogue spending where employees inflate expenses to claim back more are further examples of additional or hidden costs.
If your spending analysis produces proof that your business is suffering from unnecessary or hidden costs, you might want to consider remedial strategies. These may include:
Auditing your recurring subscription-based products or services and reviewing supplier relationships to get the most efficient deal.
Working with a payment or banking specialist to minimise unnecessary domestic and international fees.
Replacing your expense management system with prepaid employee debit cards to improve control and visibility over expenses without harming your employees’ spending ability.
Spend strategically in 2022
Conducting regular, detailed spend analysis has traditionally been within the purview of larger firms, but technology advances are making it easier for businesses of all shapes and sizes. So, if you’re a growth-focused SME leader that needs to spend strategically while protecting cash flow, make it a key priority for the year ahead.